This budget initiates the second stage of the Government's strategy for economic and social development, presented in various planning documents, notably the recently published White Paper "Programme for National Development 1978-1981".
The first stage of this strategy was marked by direct Government action to boost growth, increase employment and reduce inflation. In the second stage, public sector resources will continue to be applied so as to maximise their ability to induce growth. At the same time, the increased dynamism of the private sector, resulting from the success of the Government's policies, will enable the contribution to growth from the public sector to be scaled down. The success of the strategy depends on confidence in the ability and the willingness of the private sector to avail itself of the momentum which Government action has generated.
The Economy in 1978
The current state of the economy has already been reviewed in the Economic Background to the Budget, as well as in the White Paper on National Development. I will therefore confine myself to a comparison of the principal economic targets and achievements.
The Government's targets for the economy in 1978 were demanding. Indeed some thought that we aimed too high. What is the record? The growth rate was about 7 per cent, a rate which, for the second year running, was the highest in the EEC and in the larger group of OECD industrialised countries. Our figure was almost double the OECD average, and almost treble that for the EEC. This was a remarkable performance by any standard and one of which the community as a whole can be proud.
We also had the biggest annual increase in employment in decades. In this our experience was quite unusual internationally. Figures published by the EEC Commission show that unemployment in the Community as a whole rose last year. In contrast, it fell here, and by a much bigger amount than in those other member states where it was also reduced.
Next, the rate of inflation was dramatically reduced, from 13.6 per cent in 1977 to 7.6 per cent in 1978. The constant worries which double digit inflation brought to many people over the past few years have been dramatically lightened.
The balance of payments provided one of the most heartening aspects of our economic performance last year. Our initial White Paper—on National Development 1977-1980—made it clear that faster growth would be accompanied by some increase in the balance of payments deficit. In last year's Budget Speech, I thought it only prudent to contemplate the possibility that the deficit could rise to £350-£400 million. I am glad to say that, as a result of a number of favourable factors, including exceptionally high EEC transfers, the deficit amounted to only about £150 million. The official reserves stood at £1,252 million at end-1978, which was £51 million higher than the previous record level at end-1977.
Not only the moderate size of the deficit, but also the satisfactory trade pattern that underlies it, gives grounds for satisfaction. Exports were buoyant. The dynamism of the various sectors of the economy was illustrated by the fact that, as the latest figures show, industrial exports were higher by 17 per cent in value and agricultural exports by 18 per cent. Imports were also buoyant, but higher imports are inevitable in an expanding economy, and to the extent that they assist expansion are acceptable. The category that showed the largest rise last year—30 per cent—was that of producers' capital goods; these imports go to widen the productive base of the economy, and are welcome on that account.
Economic prospects for 1979
The Government's economic targets for 1979 have been set out in the White Paper on National Development. They are for a growth in national output of 6½ per cent, a reduction of 25,000 in the numbers out of work and a reduction in the rate of inflation, so that by end year it will be no more than 5 per cent.
These are targets, not forecasts of what will happen if events are let run their course without real effort on anyone's part. Their achievement depends upon a coherent communal effort. The aim of the Government's economic planning is to give a sense of purpose and direction so as to evoke that communal effort. If the effort is not strong enough, then the targets will not be reached.
Growth of the right kind develops a momentum of its own. The seeds of further growth lie in the achievements of 1978. Fixed capital formation grew by about 15 per cent last year, and investment in plant and machinery rose even faster, by 18 per cent. The productive capacity of our economy was considerably strengthened and there is every reason to expect this process to continue this year, buoyed up by a substantial increase in public capital investment. We have, in other words, the capacity to produce considerably more this year.
Can we find markets for higher output? This depends on our competitiveness, and I will return to this point. The required market growth should be there. The forecasts of the EEC Commission and of the OECD for the countries which provide the bulk of our markets project some increase in their growth rates in 1979. External market conditions should therefore enable us to repeat, and possibly to better, the large increase in exports last year. It is true that the forecasts to which I referred do not take account of the recent OPEC price increase, but the increase, which is phased, is not a major one and should not make a great difference in our export markets. Consumer demand at home should be buoyant.
The forecast balance of payments deficit, at £300 million, is supportable, given the buoyancy in our reserves. But the need to maintain confidence in our currency adds to the significance of the size of the deficit. It must not be allowed to increase much above the forecast level. Therefore, fast growth must be accompanied by increased competitiveness so that we can have the greatest possible export growth.
The target of a fall to 5 per cent in the inflation rate by the end of this year is ambitious but realisable. Its achievement will depend upon there being the minimum possible internal contribution to inflation. Participation in the EMS, to which I shall now refer, should reduce the imported element of inflation.
EUROPEAN MONETARY SYSTEM
Exchange Rate Policy
As Deputies are aware, the Government have announced their intention that Ireland should participate in the new European Monetary System. The commencement of the system, unfortunately, has been delayed because of the problem dealing with monetary compensatory amounts in agricultural trade. Discussions to solve this problem are continuing and it is hoped that the system will get under way shortly.
This budget is framed on the assumption that the new system will be established soon but its strategy, which pre-dates the EMS and is based on the need to achieve fundamental national objectives, will be valid whether or not the system starts to operate in the near future. That said, it must be added that our prospective entry into the European Monetary System brings a new dimension to budgetary policy and to economic policy in general. In the past, policy has been framed on the almost unquestioned assumption of continued parity between the Irish pound and sterling. Within the EMS, there will be a separate exchange rate for the Irish pound. While there may not be a departure from the present one-for-one relationship with sterling for some time at least, I must nevertheless take account of the new parity obligations which participation in the EMS will involve for us. We shall be required to keep the parity of our currency stable, subject to narrow fluctuation margins, vis-à-vis the other currencies in the system, which include some of the strongest currencies in the world. Participation in the system will undoubtedly be to our benefit and will make a significant contribution to the achievement of the Government's objectives. Through its beneficial effect on import prices, it will assist in reducing the rate of inflation. The greater monetary stability deriving from it will help promote the growth of trade and investment.
I do not wish to understate the obligations of our participation. We have at all times made it clear that the benefits of the new system will not accrue automatically. The price to be paid by the participating countries for these benefits will be the pursuit of economic policies and disciplines appropriate to membership of the system. This was clearly recognised in the Resolution of the European Council in Bremen last July which said that the member countries were "firmly resolved to ensure the lasting success of the EMS by policies conducive to greater stability at home and abroad for both deficit and surplus countries". It is my task to present today a budget which will promote stability, while also contributing to continued economic and social progress. The Government are committed to achieving a low rate of increase in domestic costs, irrespective of our joining the EMS. Clearly, however, our performance on this front will be of crucial importance in the EMS context if strains are not to be placed on the exchange rate.
Given the impressive performance of our economy over the past year or so there is every reason to feel confident about Ireland's ability to participate successfully in the EMS. Nevertheless, it will be clear that, in order to ensure sustained successful participation in the new system, management of the economy will involve paying particular attention to the balance of payments and the level of reserves. In this, fiscal, incomes and monetary policies will all have a role to play.
Monetary policy in 1978 was designed to maintain the external reserves at a level consistent with the longer-term economic aims of the Government in respect of output and employment. In the event, the reserves at the end of the year, at £1,252 million, were higher than a year earlier. However, there were some less favourable aspects of the monetary scene in 1978. For much of the year, domestic credit grew rapidly, helping to promote consumer spending and, for a time, putting considerable pressure on the reserves. Some of the growth in the reserves over the year as a whole might be attributed to capital inflows in anticipation of Ireland's participation in the European Monetary System, but the prevailing position is a strong one and gives us a good base for participation in the EMS.
It will be a major aim of fiscal and monetary policy during the year to maintain a strong external reserves position. The reserves are high by international standards, but the rapid economic development to which the Government are committed may increase balance-of-payments pressures. Given this situation, and at a time when an independent Irish currency will be seeking to establish its position on the international exchanges, it would not be appropriate to pursue policies that would tend to weaken the reserves. At the same time, the Government's economic objectives require a positive approach to fiscal and monetary policies.
The monetary policy measures for the year will be announced by the Central Bank. The aim will be to ensure that the rate of increase in domestic credit will be sufficient to meet the genuine needs of the community for productive investment and reasonable levels of consumption expenditure—thereby promoting the Government's objectives in relation to employment and inflation—without weakening the external reserves.
Because of the unsettled conditions in international financial markets, largely on account of the difficulties experienced by the US dollar, the downward trend of interest rates was reversed in 1978. The current high level of interest rates, which imposes extra costs on businesses and house-purchasers, is a cause of concern to the Government. Successful participation in the EMS holds out the prospect of a greater degree of control over domestic interest rates. The situation will be kept under close review, but we must not expect too much too soon. In a world of mobile capital, no country can ignore global trends. Within the EMS we can attain the lower interest rates some members already enjoy only if we follow the appropriate policies. Membership gives us the potential to achieve interest rates more relevant to our requirements. It does not enable us to have lower rates unrelated to our inflation and balance of payments.
Monetary policy must not be viewed in isolation. Together with fiscal and incomes policies, it provides a set of instruments which, if applied coherently and, equally important, if accepted by the community, can contribute to the achievement of our economic strategy. A responsible attitude on the fiscal and incomes fronts will enable us to avoid sudden changes in monetary policy that might set back our economic plans. The more we shirk moderation in fiscal and incomes policies, the greater the burden that will be thrown on monetary policy to maintain a balance in our external position.
The foreign exchange markets, and international traders and investors, will be watching closely the direction of the Government's policies as an indicator of its determination to ensure the stability of the exchange rate. The EMS, therefore, provides a further cogent argument in favour of adhering to the Government's commitment to reduce the Exchequer borrowing requirement as a percentage of GNP and to redirecting expenditure to productive purposes.
As the House is aware, exchange controls now operate between this country and the UK. This step was necessary to counteract the possibility of speculative currency movements as a result of the decision of the UK authorities not to enter the EMS for the present. There has been a certain amount of uncertainty about the new controls. The Central Bank and my Department have been engaged in clarifying various aspects with the financial institutions and individuals and I am satisfied that matters will settle down after a necessary period of adjustment.
I want to stress again that the new measures do not affect the majority of people in any way. Their purpose is to control capital outflows and to supervise inflows, so that the inflows can be regulated should the need arise. Given public co-operation, I believe the controls will be effective in these respects. It is not my intention to apply them in a punitive manner. I would like to be able to ease their impact and I have asked my Department and the Central Bank to keep their operation under close review and to bear in mind the desirability of introducing relaxations whenever possible, consistent with the national interest.
I should like now to refer to incomes policy, before going on to present the fiscal aspects of the Budget.
Although a framework for wage determination is still under consideration, I have to form a view on the development of incomes in general, including wages and salaries, because of the importance of incomes for budgetary policy and the budgetary aggregates. I reject as unduly pessimistic the proposition that the unrestricted pursuit of self-interest will prevail in pay negotiations this year. Price restraint and the creation of jobs on the scale needed in our country would be totally incompatible with such an irresponsible attitude. I believe that concern for the weaker sections of the community and for the unemployed, particularly our youth, will evoke a responsible attitude on the part of all sectors. As I shall show, this budget has been drawn up to give expression to that concern on the Government's part.
In my Budget Speech last year, I announced personal tax concessions which would, in conjunction with pay increases of 5 per cent, improve real disposable incomes significantly. These tax concessions and the earlier reliefs on rates, motor taxation, and social insurance contributions, expanded disposable incomes substantially in 1978 and will continue to do so during 1979. The implication is that the scope for further increases this year is limited. This view must influence claims and settlements over the next few months if we are to avoid inflicting major damage on the economy and, in particular, on job prospects.
This conclusion is borne out by international comparison of unit costs as a measure of our competitiveness. To achieve the White Paper employment targets, much larger markets must be created for Irish output at home and abroad in the face of competition from foreign output. The average rise in unit wage costs in the European Community in 1979 will, on the basis of forecasts for the individual member states, be about 6 per cent; the rise projected in our main non-Community markets is of the same order. An increase in unit wage costs in Ireland could be kept within such a figure only if further income increases this year are small.
The White Paper on National Development said that, within the context of a ceiling on pay increases and a major effort to secure industrial peace, the Government would welcome an understanding with employers and unions on targets for the creation of employment and, possibly, changes in working conditions and policies in relation to non-wage incomes. This approach has been developed by the Taoiseach who recently proposed that the trade union movement should come together with other community interests to give their full support for a five-year national effort to achieve full employment. Such an approach could assist an orderly development of industrial relations and incomes in 1979 and later years. The 1978 National Agreement provided, ofcourse, for a basic increase of 8 per cent in 1978 and provided for the negotiation of a further 2 per cent at local level. This limit was to be exceeded only where the Labour Court or an Arbitration Board so recommended or where a productivity agreement meeting certain conditions was made.
In the event, the increase in average earnings per worker in 1978 worked out at over 16 per cent. As the average increase in consumer prices was 7.6 per cent, real earnings per head rose by about 8 per cent. This is among the largest rises in the standard of living of the average worker ever recorded in this country.
This rapid growth in nominal and real earnings may have given satisfaction to those who enjoyed it, but its effects were neither universal nor were they economically commendable. The inflation rate for 1978 could, but for the high growth in incomes, have been about 1 per cent lower and we could have got more jobs than the net 17,000 we achieved.
Incomes clearly should not continue to grow in 1979 at the rate set in 1978. It is only reasonable that a year which saw one of the highest recorded increases in real per capita income should be followed by one of pay moderation. Largely as a result of the size and phasing of increases obtained in 1978, average per capita earnings this year will rise by as much as 6 per cent, even if there are no fresh pay settlements.
The approach to an incomes policy set out in the White Paper and developed by the Taoiseach is based on understanding and consensus. I earnestly hope that it will succeed. I must make it clear, however, that if it does not the Government will not abdicate their responsibilities. We cannot allow a "free for all" to take place which would damage everyone's prospects but especially those of the weakest and poorest people in our community.
There are some who might feel it unrealistic to expect the degree of moderation in income increases needed to achieve our employment, growth and budget targets. I want to emphasise that this restraint is not intended as a method of restricting the pace of improvement in living standards.
We are confident that our growth target of 6½ per cent can be achieved provided the right policies, including the right degree of income restraint, are followed. If this is not done, and if excessive income increases were to occur, then our growth target would not be met, and living standards would rise at a slower and not a faster rate than we are aiming at. The path of fastest improvement in real incomes lies along the route we have mapped out, and not in a paperchase pursuit of large money rises which are then devoured by large price rises.
Increases in non-wage incomes this year must also be moderate. There is a degree of discontent about disparities in the disposable incomes of different sections of the community. The Government will pursue a comprehensive and equitable incomes policy to minimise these disparities as far as possible.
Policy will be supplemented by measures to control price increases more rigidly if this becomes necessary. While price control is working reasonably well, the Government will continue to monitor it to ensure the optimum degree of regulation consistent with economic efficiency. I am also taking steps, as I shall explain later, to increase our capacity to counter tax evasion.
Review of 1978 Budget Outturn
I would like now to review briefly the outturn of the budget for last year, before going on to deal with the 1979 Budget aggregates and policy decisions.
The 1978 budget provided for an Exchequer borrowing requirement of £821 million, or 13 per cent of GNP. The outturn was £810 million, or 12.9 per cent of GNP. Three hundred and ninety seven million pound of this was for the deficit on the current budget and £413 million was for capital purposes.
Current Budget 1978
The current budget deficit, at £397 million, was £6 million below the estimate. This arose from changes both in revenue and expenditure.
Tax revenue showed an increase of £74 million on the budget estimate because the growth in incomes led to more buoyant receipts from income and expenditure taxes than had been expected.
Non-tax revenue was £14 million, net, less than the budget estimate. The main reason for this was a shortfall in receipts from Post Office services, most of which, however, will be collected this year; provision for this has been included in the 1979 estimate.
Current expenditure was £54 million over the budget estimate. Sixteen million pound of this excess was for higher debt service charges and £38 million for excess expenditure—mainly pay—on the non-capital Supply Services.
Capital Expenditure 1978
The Public Capital Programme accounted for £798 million of the £843 million of capital expenditure in 1978. Thirty million pound more was spent on the programme than was originally foreseen and £139 million or 21 per cent more than in 1977. The programme, by design, had a major stimulatory effect on the economy. For example, £139 million was spent on industrial investment, mainly by the IDA, and industrial and agricultural credit between them accounted for £154 million of capital expenditure in 1978.
Capital expenditure outside the Public Capital Programme increased by £21 million, mainly as a result of the issue of £15 million equity capital to the air companies.
Exchequer borrowing for capital purposes was £413 million, which was close to the original estimate of £418 million.
Exchequer Financing 1978
Sales of Government securities provided most of the new finance for the 1978 borrowing requirement, receipts from that source totalling some £554 million. During the first quarter of the year, no new money was raised on the gilt-edged market, but after that sales progressed satisfactorily and considerably exceeded initial expectations. Sales to the domestic banking sector accounted for some £67 million and to the domestic non-banking sector £187 million. A substantial part of the receipts, in the region of £300 million, came from abroad.
The indications are that a considerable portion of this inflow may have arisen from external insurance companies and pension funds covering their Irish liabilities with assets denominated in Irish pounds in anticipation of our joining the European Monetary System. There was also some evidence of investment from abroad of a speculative nature. If this investment flows out, it will have to be replaced with funds from other sources, but there are no indications so far that we are likely to be faced with a major problem.
In 1978, six new stock issues were made. Five of these were conventional fixed interest stocks and proved useful in adding to the range of securities available to potential gilt investors. A variable interest rate stock was issued in July and though the initial response was disappointing, demand for the stock increased substantially towards the end of the year and an additional tranche of £10 million had to be issued in November to meet market requirements. Small savings through the Post Office and Trustee Savings Banks in 1978, at £65 million, were the second highest on record.
New direct Exchequer foreign borrowing was kept to a minimum. At £23 million net it was at its lowest level since 1972-73. There was a considerable amount of activity during the year of a refinancing nature, either to repay maturing foreign loans or to replace loans with new loans on better terms. The new loans involve longer terms of maturity and lower interest rates than the loans which have been prepaid. These operations have reduced foreign debt repayments, relative to what they would have been in the absence of rescheduling, by £54 million in 1979, £45 million in 1980 and £80 million in 1981. The capitalised value of savings to the Exchequer in interest payments abroad is estimated at some £5 million.
Job creation 1978
In last year's budget, I described the Government's plans for a wide-ranging short-term programme of direct job-creation under which almost 22,860 jobs were to be created by the end of 1978. This programme—the most radical and ambitious in the history of the State —was vigorously pursued throughout 1978. The overall results achieved exceeded expectations—24,533 jobs were created under the programme and 22,491 of these actually had been taken up by the end of 1978.
Job-creation in the public sector concentrated on areas of greatest need. A total of 12,529 new posts was created, consisting in the main of extra health service jobs, additional teaching and clerical support posts in the education sector and additional civil service posts in the Department of Posts and Telegraphs, the Prison Service and the Revenue Commissioners—10,487 of these posts had been filled by the end of the year. The balance of 2,042 posts, reflecting the normal time lag between the decision to authorise a new post and the recruitment of a person to fill that post, will be filled early this year.
Building and Construction
The Government's initial employment target for the building and construction sector was 5,000 extra jobs. This was increased in last year's budget to 6,610 jobs, but the number of jobs actually realised, at 5,592, fell below this figure mainly because of industrial disputes, notably in the cement industry and local authority services. The major contributions to the Government's job-creation programme for the construction sector came from industrial, education and hospital building projects.
The Government's efforts to promote employment opportunities for young people met with a particularly heartening response. Last year I announced that the Government had given the go-ahead for four youth employment schemes suggested by the Employment Action Team, namely the work experience programme, the environmental improvement schemes programme, the recruitment of construction industry apprentices by local authorities and the Ballyfermot Community Survey of unemployment problems. A total of 3,800 people participated in these schemes during 1978.
In addition, the Department of Education temporary youth employment projects scheme provided short-term employment for 1,170 young people and the numbers participating in AnCO's community youth training programme increased by 1,442 during 1978.
The additional employment opportunities provided under the Government's special youth employment schemes in 1978 amounted, therefore, to 6,412 which, I am happy to say, exceeds by more than 1,400 the target set in last year's budget.
Employment incentive scheme
Since taking office, the Government increased the weekly premium payable in respect of school leavers under the employment incentive scheme from £10 to £14. In addition, the coverage of the scheme was expanded to include building and construction, hotels and catering and the services sector generally. Employers clearly found the expanded scheme to be a worthwhile incentive to take on additional workers during 1978: 10,410 new jobs were supported, 7,712 more than in 1977.
All in all, therefore, the Government job-creation effort since taking office, through both the direct job-creation programme and the employment incentive scheme, resulted in the filling of well over 25,000 extra jobs. I shall return to the subject of job-creation later.
GENERAL BUDGETARY REQUIREMENTS 1979
Before I turn to deal in detail with the budget of 1979, I want to recall some remarks I made on this occasion last year. In my Financial Statement then, I singled out certain points for special emphasis. These were:
— the Government's overriding and firm intention to come to grips with unemployment and inflation,
— the Government's determination to restore stability to our national finances,
— the Government's expectation that the stimulus being provided by the budget would create conditions in which the private sector would take over as the engine of growth, and
— deriving from these, the acceptance of an increase in public borrowing as a temporary feature of our overall strategy, with a reduction in the following years.
The results of the Government's fiscal and economic policies are now on the record. It is obvious that these policies had the desired effect of stimulating economic activity and generating the desired momentum. As a result the Government revenues and capital resources were particularly buoyant. We are confident that this buoyancy will be experienced also in 1979.
Details of revenue and expenditure were provided last week in three documents—in the volume—Estimates for the Public Services; in the paper— Public Capital Programme, 1979; and in the White Paper: Estimates of Receipts and Expenditure, 1979. I do not propose to delay the House except to mention a few points which might otherwise escape attention.
Non-capital Services 1979
Non-capital expenditure falls under two headings—the Supply Services covering day-to-day departmental expenditures and those services charged directly on the Central Fund. If it were not for the extra provision which I am making today, mainly for public service pay, improvements in the social welfare services and job creation, the non-capital Supply Services, at £2,095 million, would register an increase of £140 million or only 7 per cent on the 1978 outturn.
The Central Fund Services show an increase in cash terms of £114 million, almost 25 per cent above the 1978 outturn. Two significant items account for this—debt service and the Irish contribution to the budget of the European Communities.
Debt service costs are estimated at £512 million in 1979, an increase of £94 million, 22 per cent on the 1978 outturn. They reflect the full year impact of the higher interest rates which emerged during last year, as well as the full year cost of servicing the 1978 borrowing and the new debt to be raised in 1979.
Ireland's estimated contribution to the EEC budget this year, at £64 million, shows a substantial increase over the 1978 outturn of £45 million. This is due in large measure to the fact that we are now almost fully on the contribution system known as the "Own Resources" system. Our 1978 contribution would have been significantly greater but for the transition provisions in the Treaty Concerning the Accession to the EEC.
Public Capital Programme 1979
The Government's aim to redirect public expenditure as far as possible towards productive purposes can be seen clearly on the capital expenditure side. Compared with the pre-budget increase of 7 per cent for the non-capital Supply Service, the provision for the Public Capital Programme this year, at £974 million, is 22 per cent greater than the 1978 outturn. Of the total figure, an amount of £428 million, or more than 40 per cent, is being devoted to productive purposes such as lending by the Agricultural Credit Company and the Industrial Credit Company, grants by the IDA for industrial development and the farm modernisation scheme. Some £277 million, or almost 29 per cent, will go to infrastructural expenditure—on roadworks, water supply and sewerage works and on electricity and telephone development. More than £250 million is being provided for social investment, particularly housing and educational buildings and equipment.
Of the total expenditure of £974 million on the Public Capital Programme, almost two-thirds or some £640 million will be financed by the Exchequer. Another £39 million has to be added for capital requirements other than for the Public Capital Programme, bringing total public capital expenditure in 1979 to £1,013 million. Resources available to defray this capital expenditure are estimated at £523 million, leaving £490 million to be found by borrowing.
Revenue Buoyancy 1979
On the revenue side, that is the resources available to finance non-capital expenditure, total receipts for 1979 are estimated at £2,467 million, an increase of £444 million, 22 per cent, over the 1978 outturn. The tax revenue estimate of £2,092 million assumes a continuation of the buoyant conditions of 1978 and is based on a 6½ per cent growth rate for the economy. It also takes account of the additional buoyancy that will be generated by the budgetary adjustments today. The non-tax revenue estimate of £375 million includes an estimated £17 million in Post Office revenue under-collected in 1978.
Opening Deficit 1979
With a revenue estimate of £2,467 million and estimated expenditure on current services of £2,675 million, the opening deficit on current account is £208 million. The Exchequer borrowing requirement on capital account is £490 million. My opening borrowing requirement is therefore £698 million. However, both the revenue and the expenditure sides of the account will be affected by the provisions which I am now going to propose.
ADDITIONAL EXPENDITURE ALLOCATIONS 1979.
The first proposal I wish to discuss relates to job-creation. I have already reported on the success of last year's programme.
Our primary national objective must be to ensure that employment is available for everyone seeking work. This is the main theme of the Government's programme for National Development, which envisages a total reduction of 75,000 in the numbers out of work over the three-year period to 1981. Our target for 1979 is quite specific; it is to get the numbers out of work down by 25,000. The Government will spare no effort to achieve this goal. The importance of the attack on unemployment cannot be overstressed in the context of the Government's social policy.
The recent White Paper describes the sectoral policies which are directed to the attainment of the Government's employment targets. The main growth in employment this year is expected to come from the continued expansion of industry and the inflow of new projects through the efforts of the industrial promotion agencies. The capital resources at the disposal of these agencies this year amount to £131.5 million, which is 38 per cent more than they spent in 1978.
The Government, too, have reoriented their spending programmes in order to increase their contribution to job-creation. The 1979 Public Capital Programme and non-capital Estimates published last week provide for substantial additional job-creation in the public sector and in building and construction.
About 5,250 extra posts will be created in the public sector; 2,500 of these, the provision for which is £5.2 million, are civil service posts, mainly in the Department of Posts and Telegraphs, the Revenue Commissioners and the Central Statistics Office. New teaching posts account for a further 1,250, while the continuing expansion of the health services will provide an extra 550 jobs. The balance of almost 1,000 posts will arise mainly in the Statesponsored body sector.
Building and construction
The overall provision for building and construction-type spending in the Public Capital Programme, at £600 million, represents an increase of 27 per cent on the corresponding 1978 allocation. This is expected to give rise to the creation of almost 4,400 jobs on various projects during 1979. Hospital building, roads, sanitary services, AnCO training centres, State office building, harbour works and ESB projects will account for most of these extra jobs.
Special job-creation package 1979
The scale of job-creation in the agriculture, industry and services sectors, including the expansion of public sector and building and construction employment is unlikely of itself to ensure the attainment of the overall target of reducing the numbers out of work by 25,000. I propose, therefore, to make a special provision of £20 million for further measures to support employment creation and maintenance in the economy, including a programme of residual employment activity along the lines described in the White Paper.
Additional Civil Service posts
I have been reviewing the scope for a further contribution to job-creation by stepping up recruitment for the civil service in areas of particular need. I am allocating an additional £2.2 million for this purpose which I estimate will support the creation of 700 extra posts, mainly in the Department of Posts and Telegraphs and the Revenue Commissioners. The latter includes a special allocation of £0.5 million for the recruitment of staff to intensify the campaign against tax evasion.
A special provision of £0.8 million is being made to enable the authorised strength of the Garda Siochána to be increased by a further 500 in 1979. This will bring the overall authorised strength of the force to 10,000. The additional strength is designed to meet the growing demands on Garda resources, including the need for an improved police service in the cities.
I am allocating an additional £5.2 million to the Department of the Environment for a special programme of job creation on environmental improvement schemes and road works.
Environmental improvement schemes
With regard to environmental improvement schemes, an extra allocation of £2.6 million is being made over and above the estimates provision of £1.68 million. The total allocation of £4.28 million will enable local authorities to continue and expand the scheme, which is aimed primarily at the employment of young people; £0.5 million of the allocation is being specially set aside for work in the Dublin inner city area. The total allocation is expected to support 1,000 man-year jobs in 1979, 250 more than in 1978.
An allocation of £2.6 million is being made to increase employment on road works by up to 275 man-year jobs in 1979.
Retention of employment maintenance scheme
I announced in my budget last year that special assistance would be afforded to firms in the clothing and footwear sectors and some areas of the textiles industry, owing to the increased competition arising from the adoption of special employment measures in the United Kingdom. This assistance took the form of a payment of £5 per week in respect of each worker on the payroll in the industries mentioned. This measure is intended to be a temporary one, but the Government propose to retain this assistance in operation for a further year after 31 March 1979.
To allow for the extension of the scheme, I am providing a sum of £3 million in addition to the allocation of £5 million included in the Estimate of the Department of Labour for 1979. I am glad to say that employment in the areas in question, which have been hardest hit by the advent of free trade, was stabilised by and large during 1978. The Government have taken this step notwithstanding the introduction of the pay-related social welfare contribution scheme in April 1979, which will redress to some extent the competitive disadvantages of the sectors of Irish industry concerned.
Work Experience Programme
The work experience programme, recommended by the Employment Action Team and announced in my last budget, encountered some administrative difficulties which delayed its launching until September. Nevertheless, in the few months in which it was in operation, the programme met with considerable success and, by the end of the year, 1,685 young people had been placed with employers. In view of this very promising start, I am making available an additional provision of £1.8 million which will permit the participation of approximately 6,000 young people in the programme during 1979. The total provision for the work experience programme is, therefore, £3 million, which represents an increase in the man-year employment level on the programme from 1,500 to 3,000 man-years.
Job creation in the education area
A sum of £1.4 million is being provided for job creation in the education area. One million pounds of this is to enable the temporary scheme for youth employment operated by the Department of Education to be continued for a further year but at a higher level. This scheme, which operates on the basis of proposals submitted by youth and sports organisations, has proved very successful both in creating employment for young people and in generating enthusiasm at a local level for worth-while community works. The additional provision brings to £1.1 million the total available for this scheme in the current year and will enable 1,300 temporary jobs to be created, representing about 400 man-years employment activity, about 25 per cent more than in 1978.
In addition, a sum of £0.2 million is being provided for the employment of 50 adult education officers, mainly in the vocational service, and a further £0.2 million is being provided for the appointment of 70 child-care assistants in special schools for the physically and mentally handicapped. These appointments will be made in the course of the year.
Employment of young people as development officers
On the recommendation of the Employment Action Team, a scheme will be introduced whereby voluntary organisations will qualify for special development grants to enable them to recruit young people for development work. The scheme, which will be operated by the Department of Education, will meet the greater proportion of the cost of employing these young people for the first four years. I am making a special allocation of £0.5 million for this purpose and this, I estimate, will allow for the creation of 100 jobs. The details of the scheme will be announced at a later date.
The allocation made in the Departmental Estimates for 1979 would allow AnCO to increase the number of training places available in its own centres, in spare capacity in private and public enterprises and under its community youth training programme, by 860 to 6,150. In accordance with the Government's policy to ensure that adequate facilities are available to enable AnCO to improve considerably its contribution to the development of Irish industry, I now propose to make available an additional provision of £0.4 million. This will enable AnCO to increase by a further 220 places its training activities through the co-operation of external organisations, thus bringing the total number of training places to be made available in 1979 to 6,370.
I propose also to make a special allocation of £1.5 million for the introduction, initially on a trial basis, of two schemes, first advanced in the Green Paper on Full Employment last June, which represent an imaginative and innovative approach to job creation, namely a Temporary Hire Agency and taxation relief in respect of residence-related work.
Temporary Hire Agency
The purpose of the Temporary Hire Agency would be to develop new opportunities for employment. One major area where this could occur would be in placement of workers on a temporary basis to deal with situations such as holidays, sickness or seasonal fluctuations in demand. It is also expected that the agency can play a major role in arranging employment in local areas especially with residence-related works to which I will come shortly. The agency itself would act as the employer for the personnel meeting these temporary or local employment needs.
Relief in respect of residence-related works
In order to improve job opportunities, a scheme will be introduced, to operate on a pilot basis from 6 April 1979 to 5 April 1980, to give tax relief within certain limits for the labour element of expenditure by householders on their residences. The relief will apply in respect of improvement and maintenance work for which the householder would not otherwise be reimbursed. The operational details will be announced as soon as possible.
Further provision to support employment creation
Many of the measures which I have described, particularly the increased provisions for the work experience programme, the environmental improvement schemes programme, the Department of Education temporary grant scheme for youth employment and the employment by voluntary organisations of young people as development officers, will improve the employment prospects of young people.
The Government are also considering other possibilities for expanding employment opportunities, particularly for young people, including some further proposals which the Employment Action Team has recently made to the Minister for Labour. I am, therefore, setting aside £3.2 million for the implementation of further employment creation measures which will be directed, for the most part, at young people. The details will be announced later, but I would expect these measures to result in the generation of at least 1,000 extra posts.
The total of these special job-creation additions to the Estimates is £20 million.
Public Sector Pay
Expenditure on pay and pensions accounts for 49 per cent of the public service Estimates. The total estimated requirement under this heading for 1979 in the Estimates as already circulated is £1,026 million. This contains no provision for increases of a general nature which may follow the standard increases under the 1978 national agreement, or for any special increases other than those sanctioned by 31 December 1978.
In the light of the Government's general approach to incomes, I am setting aside a sum of £75 million to cover all further pay increases, standard and special, and any additional cost arising from the annual revision of public service pensions.
There are many claims for substantial increases in various parts of the public sector which, if conceded, would involve imposing savage tax increases. Even if this burden were to be placed on the tax-payer, what would be the result? The result would be a fresh wave of price rises, a further series of pay claims in private and public employment alike, until any apparent gains were quickly swallowed up by inflation. We have only to look back to 1975 to see what happens when inflation takes hold. Prices in that year rose by 21 per cent. No one wants to start down that road again.
If we are to make real progress, we must get this inflationary fever out of our system, and recognise once and for all that the only sound basis for increasing living standards is to have income increases which are related to increases in output. While the size of the pay increases in such an arrangement may seem small, their real value can be greater, because the extra money holds its value.
Let me make it clear that I wish to see all public sector employees share fully and fairly in the fruits of economic progress. There is no point, however, in groups pressing unreasonable claims to the stage of serious disputes and disruption. The resulting losses, as well as the consequential rises in costs, leave the community poorer rather than richer at the end of the day.
It is regrettable if the funds which might have been devoted to improving social services, meeting reasonable pay claims, or creating employment are swallowed up in losses arising from serious disruption of services or production.
While many of the current claims are at a level which puts them completely out of court, I recognise that there are genuine problems in regard to special increases in the public service. I propose to enter into discussions soon to explore the possibility of arriving at an orderly solution to these problems within the resources available.
The Government's foremost social priority will continue to be the creation of employment. Job-creation benefits not only the individual but also his family circle; it deals with much of the poverty in our community at source rather than merely treating the symptoms. Palliatives for unemployment are more easily prescribed than cures but they can be just as costly. Until the cure is effected, however, we must be concerned to alleviate the symptoms and the Government are determined to maintain progress over the broad range of social services. The opening up of new job opportunities in the health services and the provision of extra teaching and support staff in education are enabling significant improvements to be made in these services.
For social welfare recipients, an integral part of the Government's programme has been to maintain living standards at least in line with the cost of living. Excessive income increases do not make this task any easier: they both push up the cost of living and, by making industry less cost-competitive, hamper the reduction of the numbers of claimants for unemployment payments. Despite this, the Government have ensured during 1978 that social welfare recipients, with a year-on-year average increase of more than 14 per cent in the value of their payments, have not only kept pace with the cost of living but have had a share in the general improvement in disposable income and living standards. The winding-down of price inflation has, of course, protected social welfare recipients from a rapid erosion of the real value of their weekly payments between one revision of rates and the next.
Increased Weekly Payments
The Government are satisfied that the community would wish that social welfare recipients should continue to share in our growing economic prosperity by a further real improvement in the various allowances payable to them. The Government have, accordingly, decided that there should be a general increase of 12 per cent in weekly rates of short-term social welfare payments. The payments include unemployment benefit and assistance, disability benefit and maternity allowances. Thus, in the case of a married man with three children receiving unemployment benefit, the increase will be £4.20, giving a total of £39.60 per week.
In the social welfare context, the Government see old age pensioners and other long-term recipients, including widows, as deserving of special consideration. Their capacity for work and their living requirements are adversely affected by advancing years, chronic ill-health or the exceptional pressures of widowhood. As a recognition of this, the Government have decided that the increase in the rate for long-term recipients and their dependants should be 16 per cent. This will mean a total increase of £4.50 a week in the maximum contributory old age pension for a married couple, both of pension age and under 80. A contributory widow pensioner with three children will receive an increase of £4.80, bringing her pension to £34.10 a week.
The additional Exchequer cost of the foregoing proposals, all of which become effective from the beginning of April, is £40.1 million in a full year and £30.1 million in 1979. I am sure that taxpayers will not begrudge this transfer of resources to the most needy section of society.
The scope for expenditure in the social services is such that the problem of improvements comes down to one of priorities. Additional expenditure in recent years has favoured areas other than the social welfare children's allowances scheme, perhaps because of the fact that the scheme is not related specifically to need. The Government have decided to give the scheme a priority this year. I am providing accordingly for an average increase of some 28 per cent in expenditure, distributed as follows: 1st qualified child, from £2.30 per month to £3.50; 2nd qualified child, from £4.10 per month to £5.50; 3rd and subsequent qualified children, from £4.85 per month to £5.50. It would not make sense if these increases were granted indiscriminately and without reference to relative needs. They will be directed mainly to families in the lower and middle income groups and, as in the case of the other improvements in social welfare benefits, will help alleviate the impact of the reduction in food subsidies. The direction of the benefits in this manner will be effected by reducing the child allowance in the income tax code by £22 per child. Families not liable to income tax will benefit in full from the increases in the social welfare children's allowance. For income tax payers, the benefit will be the greater the lower they are on the income tax scale. The increased allowances will be payable from the beginning of April next. They will cost £11.7 million in 1979 and £14.6 million in a full year, against which there will be an offset of £3.5 million in 1979 and £5 million in a full year from the reduction in the income tax child allowance.
Unemployment Benefit for Married Women
The Government are committed to work towards the elimination of discrimination against women in the social welfare code. They have actively supported the recent adoption of the EEC directive requiring the progressive implementation, within a period of six years, of the principle of equality of treatment for men and women in matters of social security. A first step in the implementation of Government policy, which I announced in last year's budget, was the removal of the special conditions for receipt by single women and widows of unemployment assistance. The White Paper on National Development indicated that the situation of dependent spouses in the social welfare code is being examined by an interdepartmental working party. In the meantime, the Government are satisfied that a further substantial step should now be taken towards eliminating discrimination and they have decided to double the maximum duration of payment of unemployment benefit for married women, from the present 156 days to 312 days.
Means Test and Minor Improvements
The Government are also resolved to remove anomalies in the social welfare means test. I am providing in this budget for a number of significant measures in this respect, together with certain other minor, but still important, improvements.
These changes which, together with the longer duration of unemployment benefit for married women, will take effect from next April at a cost to the Exchequer of £0.7 million in 1979, are listed in a document which I shall make available setting out the "Principal Features of the Budget".
Pay-Related Social Insurance
The changeover to pay-related contributions for financing social insurance benefits will commence in April. Contributions will then become broadly proportionate to earnings. Lower-paid workers will benefit from this change and there will also be significant relief for industries, employing such workers, which are sensitive to competition from low-cost countries. The new system will also bring an increase in maximum short-term pay-related benefits since these will now be related to a new ceiling of not less than £5,000 as compared with the existing ceiling of £2,500.
Ex gratia Public Service Widows' Pensions
Ex gratia pensions are payable to the widows and children of pensionable public servants who retired or died prior to the introduction of contributory widows' and children's pension schemes. Originally, these ex gratia pensions were at half the rates applicable under the contributory schemes. In 1977 the proportion was increased to two-thirds of the contributory rate.
Having considered further the position of these widows, I have decided to increase the rate of ex gratia pension, as from 1 July next, to five-sixths of the rate payable under the contributory scheme. The estimated cost of this concession will be £675,000 this year and £1.5 million in a full year.
Veterans of the War of Independence
I am also providing some further improvements for veterans of the War of Independence and their dependants. Special allowances are paid to veterans who satisfy a means test and who are, therefore, in the less well-off category. Apart from revisions in line with increases in public service pensions generally, the basis of these allowances has not been altered since the early sixties. In view of this and the necessitous circumstances of those concerned, I have decided that the means test ceiling should be raised by £100. This will give an increase of that amount to all allowance holders, over and above the increase which they will receive as a result of the annual revision of public service pensions.
Last year, I introduced a telephone rental subsidy scheme for veterans living alone. I now propose to extend this scheme so that a veteran living with his wife, or with an invalid, or with a person looking after him will enjoy the concession.
I also propose to extend the scheme of funeral grants so that it will apply in respect of holders of "duly awarded" service medals. I also propose to increase the grant under the scheme from £100 to £200.
These concessions, which will apply from 1 July next, will cost an estimated £600,000 this year and £1.2 million in a full year.
A total of £399 million has been provided for education in the Estimates. With the approval of the Government, I am making an extra £2 million available in the budget to be devoted to improving educational service, in addition to the £1.9 million allocated to education for the purpose of job creation. The Minister for Education will announce the details tomorrow.
Supplementary aid to the Arts
I have been in consultation with the Taoiseach regarding the financial difficulties of several of our theatres and other arts enterprises, particularly where capital sums are involved which are substantial in relation to the operational costs and the ability of theatres and other organisations to generate their own income.
I have set aside, therefore, a sum of £500,000 to meet this particular need. Details of the assistance will be announced later, following consultation with the Arts Council.
The additional expenditure allocations which I have announced will add a total of £141 million to my starting current deficit of £208 million. From this I am deducting £40 million for unspent balances in the hands of Departments at the end of 1978, giving a current deficit of £309 million. Thus, taking account of the Exchequer borrowing requirement for capital purposes of £490 million, the overall Exchequer borrowing requirement for 1979 stands at £799 million at this point.
Before presenting my specific tax proposals, I should like to stress that the Government's objective is to minimise the tax burden, to ensure that it is spread equitably and does not discourage personal and corporate initiative. Many significant changes in taxation have been introduced already by the Government from which all sectors have benefited. The personal and corporate taxation concessions in last year's budget will cost some £130 million this year. The abolition of rates on domestic dwellings and the removal of motor vehicle duties from all but large cars will cost about £124 million this year. The proposals which I will outline today are designed to carry our policies a stage further.
Personal income tax —Allowances, rates and bands
The increases provided last year in the main personal allowances for income tax purposes were unprecedented in size. They have been, and continue to be, of substantial real benefit to all income taxpayers.
It is not to be expected that reliefs of such a large order could be repeated this year. Nevertheless, subject to the resources constraint, the Government wish to give further expression to their policy of reducing the disincentive effects of personal taxation. With this in view I propose a further improvement in personal allowances combined with an amendment of the lower income tax bands.
The increases in the personal allowances will be as follows:
—the single allowance to be increased from £865 by £250 to £1,115
—the widowed allowance to be increased from £935 by £250 to £1,185, and
—the married allowance to be increased from £1,730 by £500 to £2,230.
The structural modification consists of abolishing the 20 per cent rate of income tax payable at present on the first £500 of taxable income and applying the rate of 25 per cent to the first £1,100 of taxable income, that is after the personal and other allowances, including the increases I have just mentioned, have been taken into account.
These changes will benefit all married taxpayers, of whom some 21,000 will be completely freed from tax liability. The great majority of other taxpayers will also benefit and about 19,000 of them will be freed from any liability to income tax.
In the case of married taxpayers without children the liabilities, if not removed altogether, will be cut by amounts ranging from £100 to £135 a year, depending on income.
The effects for married couples with children will be broadly similar, but here it is necessary to take into account also two other budget changes which I have already outlined, namely, the increases in the social welfare children's allowances and the associated reduction of £22 in the income tax child allowance of £240 per child. For those not removed from tax liability, the combined effects of the changes in income tax and in the social welfare children's allowances will be to benefit married couples by amounts varying upwards from about £100 a year in cases where their children qualify for the social welfare allowances.
As regards taxpayers who are single or widowed without children, most of these will benefit by varying amounts. For those of them who are not entitled to any allowance other than the single or widowed person's allowance and whose incomes exceed £7,715, or £7,785, as appropriate, there will be tax increases not exceeding £15 a year. If these taxpayers are, in fact, entitled to other allowances, these income points will be higher.
The document "Principal Features of the Budget" gives further examples of the effects of the various changes I have mentioned.
The cost of these changes in personal allowances and in the tax rates and bands will be £30 million in 1979 and £47 million in a full year.
For single or widowed taxpayers with dependent children there will be a substantial new relief which I shall now indicate.
A category deserving of particular consideration is the one-parent family. Where the parent of a dependent child or children is widowed, deserted, separated or unmarried, the special circumstances justify, in my view, the giving of additional tax relief. I have decided that this should be done by the introduction of a special allowance of £250. The allowance will apply as from 6 April next and will be in addition to whatever other allowances and reliefs are available under existing law. The cost of the relief will be £700,000 in 1979. The necessary provisions will be contained in the Finance Bill.
As Deputies will be aware, income tax relief is given in respect of personal interest, including house-mortgage interest. This relief is a valuable one for householders who, it must be remembered, have also benefited from the abolition of domestic rates. Since 1974, there has been a limit of £2,000 a year on the amount of personal interest qualifying for relief. There have been many representations for an increase in the limit to take account of changed circumstances. I have decided to raise the limit to £2,400 a year, with effect from 6 April next.
I have decided also that the relief ordinarily allowable should be scaled down appropriately in cases where an employee enjoys a preferential rate of interest. The reduced relief in such cases will be computed by reference to the proportion that the actual rate of interest paid bears to a specified rate.
The necessary provisions to give effect to these changes in interest relief will be included in the Finance Bill. There will be no net cost to the Exchequer.
Trustee savings banks
The increase in the limit on interest relief will benefit house-buyers, so this is an appropriate point at which to mention a measure which will increase the amount of funds available to house-buyers.
I propose to empower the trustee savings banks to grant house mortgage loans. The overall limit on lending by these banks will still apply—15 per cent of the balances due to depositors—but, since their aggregate lending has generally been well within this limit, it still leaves them worth-while scope for additional lending in the housing area. The same requirements will apply in regard to the allocation of mortgage funds and certificates of reasonable value as are being applied by the Minister for the Environment in the case of the building societies.
Permanent health insurance policies
At present, premiums paid under permanent health insurance schemes, which are schemes designed to maintain earnings during illness, are not allowed as deductions for tax purposes. The benefits payable are not regarded as income chargeable to tax unless and until they have been received for more than a year. It is now proposed that tax relief will be given in respect of such premiums but the benefits under the policies will be treated as taxable income from the outset. The change will take effect from 6 April 1980.
The tax and other measures taken by the Government during the past 18 months have afforded very considerable stimulus to enterprise and have created a climate in which the business world can plan ahead with confidence.
The various substantial tax reliefs for families and individuals have operated to boost demand. In addition, I introduced in last year's budget a package of tax changes designed to ensure direct relief for businesses. Chief among these changes were the large increase in the profits thresholds for corporation tax and the improvement of the three-year scheme for an incentive rate of 25 per cent for manufacturing companies.
Export sales relief
I should also mention the new scheme, already announced by the Minister for Industry, Commerce and Energy, for the replacement of export sales relief. The 10 per cent rate of corporation tax, which will be applicable to manufacturing profits earned from January 1981 to the end of the century, should act as a dramatic stimulus immediately and lead to continuing growth during the years ahead.
I have been asked to consider sympathetically the continuation of stock relief which, under existing legislation, is available for stock increases in accounting periods ending before 6 April 1978. This ad hoc relief was introduced as a temporary measure in the 1975 budget in recognition of the fact that, because of very heavy inflation, a substantial portion of the accounting profits of many businesses was, in practice, tied up in increased costs of trading stock. It has since been continued, with some modifications.
In considering the question of a continuance of the relief, it is appropriate to have regard to the reduction of the rate of inflation which has taken place. The rate is now down significantly below the level which led to the introduction of stock relief and the grounds for continuing it have diminished, to say the least. However, I have decided to give it for a further year, on the basis of allowing threequarters of the relief granted up to now. The renewal will cost the Exchequer £5 million this year. The detailed technical provisions will be contained in the Finance Bill.
Investment Allowances—Designated Areas
I intend to move in the Finance Bill that the existing legislation governing the special investment allowance of 20 per cent for new plant and machinery in the designated areas be renewed for a further period up to the end of 1980, after which the proposed corporation tax scheme for manufacturing companies will apply throughout the State.
At present capital allowances on new plant and machinery are given on the basis of gross cost; in other words, no deduction is made in respect of grants payable from public funds. The effect of this is that the Exchequer gives tax relief in respect of a considerable element of expenditure which the Exchequer itself has borne. This has always been recognised as anomalous and there can be no reasonable ground for complaint if this anomaly is removed. I intend to do so in the Finance Bill.
Clearly, the direct Exchequer cost of tax incentives is not the only indicator of the Government's priority for industrial expansion. So, also, are the massive increases in the expenditure allocations for industrial promotion, development and credit, and for the infrastructural development needed to support industry. The general regime for industry is one of the most favourable in the world, comprising as it does an impressive array of incentives.
The Government now look to private sector enterprise to make decisive progress this year towards achieving the national investment and employment targets.
All enterprises, irrespective of size, have a part to play. The contribution that can be made by small and mediumsized firms should not be underestimated. The Government are gratified by the tremendous response from such firms to the special investment loan facilities that are being provided for them by the Industrial Credit Company in conjunction with the European Investment Bank. The favourable interest rate charged on such loans is made possible by the fact that the foreign exchange risk on the loans is being borne by the Exchequer. This assistance will continue to be available.
For business as a whole, 1979 is a year of opportunity and challenge. Part of the challenge will be provided by participation in the EMS. The potential benefits from participation are considerable. For their part, the Government stand by the assurance already given that, if any significant short-term difficulties should arise from our decision to participate in the system, the Government will respond in a positive and sympathetic way.
I come now to a proposal affecting value-added tax.
As Deputies will be aware, one of the changes required by the EEC Sixth Directive on VAT, which was adopted by the Community in 1977, is the abolition of the first tier of the special two-tier VAT which applies at present to a limited range of goods. As announced some time ago, the general intention is that from 1 March 1979 the first tier of the two-tier VAT will be replaced by appropriate excise duties designed to match the part of the VAT revenue foregone.
I have, however, received representations seeking a variation of that intention in so far as certain goods handled by the electrical trade are concerned. The representations made have stressed the adverse effect on traders in the State of cross-Border smuggling of these goods and have sought an alleviation of this position through a reduction of tax.
The Revenue Commissioners are, of course, making every effort to prevent this smuggling and the associated tax evasion. Having reviewed the position, I have decided, by way of concession, to refrain from imposing excise duties on two of the categories of goods in question, namely, radios and record players, but a VAT rate of 20 per cent will apply to them instead of 10 per cent. This will bring the VAT treatment of these goods, from 1 March 1979, into line with that of other related items.
The concession will cost about £1 million in 1979, inclusive of £0.3 million in respect of a special relief required in order to avoid double taxation of stocks which will have already borne the first tier of VAT.
Taxation of Farming Profits
It is estimated that total farm income last year was almost 140 per cent higher than in 1973, the year of our entry to the EEC. That figure understates the actual improvement in the fortunes of individual farmers because farm income is now divided among a smaller number of farmers than was the case six years ago. Our main agricultural products have had the benefits of guaranteed prices and unlimited outlets. Investment in farming is continuing at a high rate and the prosperity of agriculture—and of rural Ireland in general—is plain for all to see.
This prosperity is highlighted by the 1977 farm management survey of An Foras Talúntais, published last August. The survey noted that:
the standard of living enjoyed by a sizeable proportion of our farmers must have improved out of all recognition and that modernised farming is very prosperous, with many farmers having assets, investment levels and incomes formerly associated with the world of commerce only.
During these years, the farming community have continued to benefit from a degree of State support which is very considerable. The Estimates for 1979 contain a total provision of £160 million for State aid to agriculture. In addition, it is estimated that the European Agricultural Guidance and Guarantee Fund will benefit Irish agriculture to the extent of some £385 million. It is clear that Irish agriculture can no longer be regarded as an underendowed sector of our economy.
It is against this background of increasing prosperity that we must look at the question of farmer taxation. Farmers will pay about £16 million in income tax in 1979 and about £36 million in rates on land. This total of £52 million represents a contribution of 5½ per cent of farm income. Last year the contribution was £38 million, or 4½ per cent of farm income. Making due allowance for investment needs in agriculture, the farmers' contribution falls far short of the share of income contributed in taxation by the rest of the community, as is clear from the fact that employees paid about £526 million in income tax in 1978, representing about 16 per cent of their earnings.
It is equitable that such a thriving sector of the economy should move as rapidly as possible, without damage to its continued expansion, to the stage of full acceptance of its share of funding the community's needs. It is only fair to say that comments from individuals and those in a representative capacity would indicate that the general body of farmers is willing to do so.
In line with this principle, I am taking further measures this year to increase the farming sector's contribution to the cost of public services. The threshold for liability to income tax will be reduced from £60 RV to £50 RV, making a further 6,000 full-time farmers, or 27,000 in all, liable for tax. Also, the multiplier which is used to calculate farmers' income on the national basis will be increased from 90 to 125. This new multiplier is fully justified by reference to farm incomes in 1978. As a result of these changes, farmers' income tax will yield about £30 million in the income tax year 1979-80, almost all of which will accrue in the calendar year 1980.
There are two other income tax matters I should mention. The farming organisations have drawn my attention to the possibility that a farmer who had opted to have his income assessed on the notional basis could find himself then being taxed on an income assessment appreciably in excess of his actual profits, because, under the provisions of the Finance Act, 1978, he must continue on that notional basis for two subsequent years. This could happen, particularly in a case where stock losses occurred by reason of disease. I arranged to have this problem examined in discussions over the past year between the farming organisations and the Revenue Commissioners. These discussions have now resulted in an agreed recommendation to the effect that a farmer may opt out of the notional basis at any stage, provided he remains on accounts for the year concerned and the two subsequent years; the Revenue Commissioners would have the right to demand accounts for the preceding one or two years of notional assessment and to reassess accordingly if the accounts indicated a higher tax liability. I am pleased to accept this recommendation, and I will include provisions accordingly in this year's Finance Bill. I consider that this arrangement will remove any danger of a farmer having to pay tax on an income he did not have, while at the same time it guards against the possibility of tax avoidance, which is the basic aim of the three-year requirement.
The second matter concerns income averaging. I announced in last year's budget that discussions were to take place between the farming organisations and the Revenue Commissioners about the possibility of providing for a suitable system of income averaging. These discussions are now nearing completion and I expect to be in a position to make the necessary provision in the Finance Bill.
My final item concerning farmers relates to the cost of services. In addition to the measures which are being taken to recover a proportion of the cost of the animal disease eradication programmes, the Government consider that the farming community is now in a position to pay for the cost of the education, research and advisory services specially provided for agriculture. These are estimated to cost about £30 million in the current year. The cost will be recovered by means of a levy of 2 per cent on the following agricultural products—cattle, milk, pigs, sheep, sugar beet and cereals.