Prudent management of the public finances and improving the climate for economic development are normal priorities for a Minister for Finance when drawing up his Budget. This obligation takes on a special significance at a time of international economic recession, such as we now experience.
Because the international recession has had a particularly damaging impact on our energy dependent open economy, there is a new burden to be carried today. We must all ensure that this new burden, unwelcome though it may be, will be shouldered evenly by all who can bear it. A progressive economic policy can only be implemented through the collective commitment and action of all sections of the community. It must be built on the firm foundation of a caring and sharing society, so that in overcoming the immediate problems, we emerge more determined to achieve a healthy social and economic order which we can all respect.
My proposals today, and Government policy throughout the year, will be firmly directed towards those ends.
The experience of last year indicates that we have found it difficult as a nation, in a period of growing prosperity, to adjust to the new reality of international economic recession. But adjust we must, and my budget proposals today are intended to encourage that adjustment in our individual and national interest. The pursuit of social justice in a basically healthy economy, beset as it may be by serious difficulties, has been a guiding principle for the Government in adopting the proposals which I will outline. I hope that they will evoke a positive and helpful response at this critical time in our national development. Our renewed determination, following the dramatic upsets of the past year, to achieve the objectives of equity and a proper balance in our national finances will not yield immediate results in the year ahead, but it will make a major contribution towards positive progress in that direction.
There is an urgent need to reduce the balance of payments deficit and the level of Exchequer borrowing. In seeking to reduce the level of borrowing, the Government have concentrated on curbing the growth of public expenditure, so as to ensure that taxpayers will be called upon to contribute only to absolutely essential services. We must see to it that the taxpayer's money is used effectively and in a manner that he or she will fully endorse. This will also ensure that the general burden of taxation is kept to the minimum consistent with economic and social priorities.
I will return to both of these themes later, but first I wish to review the economic developments in 1979. These comments will be brief because Deputies have already received a copy of the paper Economic Background to the Budget, 1980.
THE ECONOMY IN 1979.
Obviously, there has been a complete change of circumstances compared with the situation as it appeared this time last year. Nobody foresaw then the massive oil price increases that were to come later in the year with their attendant problems. The farming community met serious difficulties during the year resulting in an unexpected fall in their incomes. The pattern of industrial disputes and, in particular, the industrial dispute in the Post Office, which commenced in February and was to last until June, caused disruption of services and interference with private, commercial and industrial life. A recently published EEC report indicated that, relatively, we lost more man-days through industrial stop pages in 1978 than any other EEC country. Our experience in 1979 can hardly have improved the record.
So what started off as a year with great economic opportunities eventually deteriorated to the point of serious setback to the targets for growth and financial stability which the Government had set for the year as a whole.
But performance, although not up to expectations, had its good features. The growth rate last year at 3 per cent was in line with the OECD and EEC average. There was a further significant increase in employment. Registered unemployment showed a substantial decline. If agricultural exports were disappointing, industrial exports performed strongly. They rose by almost 25 per cent in value compared with 1978, while investment grew in double figures for the second year running.
Nonetheless, at budget time last year the expectation was that the balance of payments deficit for the year would be about £300 million. Present estimates put the deficit at about £760 million, or more than 10 per cent of GNP. In both absolute and relative terms this is very high and gives serious cause for concern. It is true that higher oil prices were responsible for about £140 million of the increase in the deficit, but it is equally clear that as a community we are living far beyond our means. Progress towards our targets has been obviously impeded by these factors. To reach them now we must adjust our immediate individual expectations.
REVIEW OF 1979 BUDGET OUTTURN
As regards Government finances, the 1979 Budget envisaged an Exchequer borrowing requirement of £779 million, or 10.5 per cent of GNP. The outturn was very much higher at £1,009 million, or 13.7 per cent of GNP. A sum of £522 million was borrowed to meet the deficit on the current budget and £497 million was borrowed for capital purposes.
The current budget deficit was £233 million above the estimate, partly because of excesses on public service pay, social services and CIE, and partly because of delayed collection of revenue due to the industrial dispute in the Post Office. In addition, there was the cost of the PAYE tax concession under the national understanding and also a shortfall in revenue from hydrocarbon oils and car sales.
The subsidies of £59 million which were received during the year as a result of our participation in the EMS helped to reduce somewhat the impact of these items.
Capital expenditure totalled £1,035 million, of which £1,001 million was for the Public Capital Programme.
Approximately one-half of the total borrowing requirement was raised through foreign borrowing, including £144 million from the European Investment Bank. The other half was raised from domestic sources, mainly through sales of Government securities to Irish residents, including the commercial banks.
ECONOMIC PROSPECTS FOR 1980
When one turns then to the economic prospects for 1980 and the background to this budget, there is no escaping the fact that this is going to be a difficult year, not least because of international factors beyond our control.
During the past 12 months there has been a severe deterioration, related directly or indirectly to oil prices, in the economic outlook. During 1979 alone the price of crude oil rose by more than 80 per cent and there have been further increases since the end of the year. Many countries as well as ourselves face strained balance of payments positions, higher inflation and the prospect of significantly slower growth. The oil importing world as a whole is significantly poorer as a result of the shift of wealth to oil producers.
The international reaction to these developments is still emerging. Last year, economic policies in many countries became more restrictive. It remains to be seen what the pattern of response will be to the oil price increases which have occurred since December last. There could be a further widespread tightening of policy internationally. Much as we might deplore this, it is a risk which cannot be ignored. Even as things stand, little or no growth is expected in the OECD area this year. World trade could grow at even less than half last year's rate. There is the strong probability that our main export market—the U.K.—will actually contract. Competition, both at home and abroad, will clearly be intense this year, and there is no prospect of an early improvement.
When the world economy is faced with a marked downturn, we as an exporting country dependent on foreign markets to absorb half of our production are pulled in the same direction. But, if we have no real control over external developments, we alone are responsible for our reaction to these events; and there are significant economic factors which will help. Ireland is an attractive investment location from which to exploit the market of 260 million people in the countries of the EEC. Last year we were particularly successful in our industrial promotion. These new and established industries should ensure that industrial exports will increase, even in the face of tough international competition, provided we can keep costs in check. The outlook for agricultural exports, which are so vital to our economy, is also better than last year.
However, the fact that there was a further major increase in the price of oil in December last rules out the prospect of any automatic improvement in the balance of payments. The prospective deficit is so large that policy cannot remain passive; corrective action must be taken. We cannot afford to let the deficit go on growing. If we did, inevitably this would require drastic measures from us—and perhaps not too far in the future—measures which could cause far-reaching hardship, and wipe out much of the economic advance which we have made in recent years.
EEC AND EUROPEAN MONETARY SYSTEM
We are approaching the completion of our first year's successful participation in the new European Monetary System. The events of the past year have, if anything, reinforced the reasons for its introduction. The international economy has been buffeted by oil price increases and political instability. These developments have intensified pressures on exchange rates. In all of this, the EMS has been an important influence towards stability.
From our national standpoint membership of the system, and the breaking of the link with sterling that followed, necessitated important adjustments in monetary and financial practices. The instability of sterling outside the system added to our difficulties of adjustment. The Government are satisfied, in the light of experience during the past year, that our participation was fully justified and that it can help us to increase trade and investment—particularly with EEC countries—and to reduce, over time, the rate of inflation.
Progressive policies must also be pursued by the European Community to bring about the stated aim of balanced economic development in which the EMS, through monetary stability, can play a significant role. We are also determined to pursue domestic policies which are consistent with our membership of the EMS and to protect the stability of the exchange rate. There are no soft options in this direction. A strong currency depends on the disciplined pursuit of sound economic policies and it is the intention of the Government to do precisely this.
MONETARY POLICY
Monetary policy in 1979 was formulated with the aim of limiting the growth in credit to a level that was consistent with the protection of the exchange rate and maintenance of external reserves adequacy. It was considered that the external reserves could be allowed decline somewhat so as to permit an 18 per cent growth in private sector credit.
The credit policy year runs from mid-February to mid-February and, while figures are not yet available, it looks as if the outturn for the year will be close to the original guideline. In order to achieve this, however, the Central Bank was forced to take steps to slow down the increase in private-sector credit, which was growing at an unsustainable rate, and to ensure that available credit was channelled to the productive sectors of the economy.
The overall position was eased considerably by increased foreign currency lending by the banking system. In addition, the Agricultural Credit Corporation and the Industrial Credit Company were authorised to undertake certain foreign currency borrowing for onlending to agriculture and industry, respectively. In October, the Government made arrangements to allow the Trustee Savings Banks to provide an additional £10 million by way of bridging finance in order to ease the position in the housing market where particular problems arose.
The detailed monetary policy measures for the coming year will be announced by the Central Bank in the near future. The bank has already indicated that there is every likelihood, on the basis of the information now available, that the guideline for the growth of credit in the coming year will be less than the 18 per cent guideline in force in the year to February 1980.
The current level of interest rates is high, both by historical standards and by reference to the expectations of many borrowers. This is but a reflection of world trends at this unsettled time. In fact, prime lending rates in this country have increased by proportionately less during the past year than they have in any other EEC country. Against this background, and in the light of the need for a restrained policy here, one cannot be optimistic about the prospects for any early fall in interest rates.
The exceptionally high level of inflows into the building societies in the past year has meant that they were able to avoid any increase in mortgage rates. Net inflows during the year came to almost £200 million, not far short of twice the previous year's level, and were more than sufficient to finance the societies' lending programmes for the year. The societies enter 1980 with a high level of liquidity and they should have good prospects of repeating last year's record performance with regard to the number of units financed.
Saving and Exchequer Financing
I have given particularly careful consideration in the circumstances of this year to the desirability of encouraging saving in the community. With a view to increasing the contribution from domestic sources to Exchequer financing, I propose to improve the attractiveness of the Government's saving schemes.
The rates of interest on deposits in the Post Office Savings Bank and the Trustee Savings Banks will be increased by 1 per cent. Ordinary rates will increase from 7½ per cent to 8½ per cent and Investment Accounts in the Trustee Savings Banks from 11 per cent to 12 per cent.
I propose also to extend the limits on holdings of Savings Certificates and Indexed-Linked Savings. These savings media provide the investor with very attractive tax-free returns. The maximum amount which a person may hold of the 9th Issue of Savings Certificates is £7,500, as fixed in 1978. I am increasing this limit to £15,000. I am increasing from £750 to £1,500 the maximum amount which may be held in Indexed-Linked Savings Bonds. Anyone aged 65 or over can buy these bonds. I am also increasing from £50 a month to £100 a month the maximum amount which a person may invest in the Indexed-Linked National Instalment-Saving Scheme.
In addition, I intend to increase the prize fund for Prize Bonds so as to enhance their attraction for investors.
Foreign Borrowing
Foreign borrowing serves to maintain the external reserves at an adequate level, as well as supporting domestic sources in financing the Exchequer borrowing requirement. The volume of such borrowing will be decided from time to time having regard to the Exchequer's financing needs and the position of the external reserves. I might add that part of the foreign funds to be raised in 1980 will come from the European Investment Bank and that loans from that source have the particular advantage that we receive the EMS-related interest subsidy on them.
GENERAL APPROACH TO BUDGETARY AGGREGATES IN 1980
A major constraint on the Government's room for manoeuvre this year has been the need to reduce the Exchequer borrowing requirement. Borrowing in 1979, at 13.7 per cent of GNP, was far in excess of that obtaining in most other member states of the EEC. Central Government borrowing in these countries was generally 3 to 4 per cent of GNP. Roughly half of Exchequer borrowing was to finance current expenditure. I am determined to ensure that the burden on the taxpayer for debts created to pay for current services will not continue to grow indefinitely. We cannot ask the taxpayer of tomorrow to pay for the services we require today. This would be socially unfair and economically irresponsible.
Borrowing, the balance of payments and the external reserves are all interlinked. Government borrowing allows a higher level of expenditure in the economy, which generates a demand for further imports and adds to the external deficit. A reduction in borrowing is required in the short-term in order to help reduce the balance of payments deficit to a sustainable size.
Expenditure 1980
The level of social, economic and other services to which the taxpayer contributes has grown inexorably, and the demands for further extensions of these services are virtually unending. However, it is time for us to take a hard look at the position and to accept that services can only be provided if we are willing to pay for them. The changing social and economic climate requires a continuing re-assessment of existing services. If we are to cater for the pressing needs of today and tomorrow, we cannot blandly assume that yesterday's services must all remain intact.
As is evident from the Current and Capital Estimates, the Government's aim in reviewing expenditure has been to ensure that taxpayers will be called upon to contribute only to absolutely essential expenditure. At the same time the Government's objective is to redistribute expenditure, concentrating on the areas of greatest need and potential so that the maximum economic and social benefit is derived from it.
The process of curbing expenditure involves many difficult decisions. It also comes up against the constraint that much of Government expenditure cannot be changed in the short-term because of virtually fixed commitments. It is unreasonable to suggest that such commitments can be significantly altered in any one year.
The Government have had the difficult task, therefore, of deciding what services could be deferred or curtailed, while providing for the mainteance of essential services and protecting the interests of the weaker sections of the community. Government subventions should be paid only to those who need them and should be designed to achieve the maximum economic and social benefit.
Expenditure on the non-capital services is up by 16 per cent—from £2,906 million to £3,367 million—before the additional provisions which I am making today. However the cost of the non-pay supply services is projected to increase by only 5 per cent, representing a real curb on the growth of expenditure.
The Government are committed to the promotion of science and technology as major contributors to economic and social development. Expenditure in this area has been collated this year by the National Board of Science and Technology in a new science budget. Notwithstanding the current difficult financial situation, I have, in the main, increased the provisions for the public sector institutions active in science and technology, in particular the research institutes.
Public Capital Programme 1980
The Government are conscious of the need to continue to give priority to public investment, so essential for our economic development. The Public Capital Programme, at £1,154 million, is 15 per cent above the 1979 outturn. This will enable the overall volume of activity financed by the programme to be maintained in spite of competing pressures on resources this year.
More importantly, in deciding the individual allocations within the programme, the Government increased the proportion of the Programme devoted to infrastructural development from 29 per cent in 1979 to 33 per cent in 1980, inclusive of an increase of 28 per cent in the provision for telecommunications development. Some 42 per cent of the programme will be devoted to improving the productive capacity of the economy, including an increase of 22 per cent in the provision for industrial promotion by the IDA, SFADCo and Údarás na Gaeltachta. A further £29 million has to be added for other capital requirements outside the programme, bringing total capital expenditure to £1,183 million.
Receipts from the European Regional Development Fund assist in financing capital expenditure. The Government have had discussions with the EEC Commission about the difficulty experienced by member states in getting commitments of fund money translated quickly into payments. As a result of these discussions, receipts from the fund are expected to increase from £26 million in 1979 to £47 million in the current year.
Other resources available to defray capital expenditure are estimated at £593 million, leaving a balance of £543 million to be found by borrowing.
Revenue Buoyancy 1980
The resources available to finance current expenditure come from tax and non-tax revenue. Tax revenue, before the adjustments which I will make today, is estimated at £2,450 million, an increase of £441 million, or 22 per cent over the 1979 outturn. The estimate for non-tax revenue is £571 million, an increase of £196 million, or over 50 per cent, on the 1979 outturn. Both the tax and non-tax revenue estimates include amounts carried over from 1979 as a result of the Post Office dispute.
Opening Deficit 1980
The estimated expenditure of £3,367 million on current services and the revenue estimate of £3,021 million give an opening deficit on current account of £346 million. Adding the Exchequer borrowing requirement for capital purposes of £543 million, this gives an opening borrowing requirement of £889 million.
This budget's proposals will involve tax reliefs and tax increases, as well as changes in expenditure mainly in relation to social welfare. Before proceeding to deal with these policy changes, the presentation of the cost of basic services must be completed by making an adjustment for public service pay. I should like to speak about pay policy generally before doing this.
Incomes Policy
Government action can provide only part of the response needed to the problems posed for us. Success or failure in dealing effectively with these problems will depend critically upon the development of incomes, the climate of industrial relations and a shared community concern. I am confident that the overall impact of this budget will be seen as making a positive contribution in this direction.
Centrally negotiated pay arrangements have operated through the whole of the past decade. Many workers—including in particular the lower paid—could not have hoped to do as well without the support of the collective strength of the trade union movement through the centralised arrangements. Increases in pay secured during the decade more than compensated for movements in the consumer price index.
The national understanding, as a development of these centralised arrangements, has been, on balance, worth while. It has united Government, workers and employers in a comprehensive response to national problems. It has shown that pay developments cannot be seen in isolation, because they influence the entire economic and social fabric, and because workers' aspirations are rightly not limited to pay alone. Benefits are flowing from the understanding. The discussions which led up to it, and which have continued since, have given all sides a deeper appreciation of each others' aims and of the very real constraints within which all must operate. The efforts which are being made by responsible trade unionists to secure greater industrial peace is a significant development, deriving in large part from the collective approach to industrial relations which the understanding has fostered.
This is not to claim that the understanding has worked perfectly. The Government accepted the pay terms with some misgivings as to the effect they might have on the economy, and only because they indicated restraint in regard to special claims and an assurance of industrial peace. The extent of special increases and the adverse development of unit wage costs in industry last year gave substance to these misgivings. Last year, costs here rose significantly faster than the EEC average. An exporting country like ours, with a large deficit in the balance of payments, cannot afford to lose competitiveness internationally through such increased costs.
The basic pay provisions of the National Understanding will lead to a further substantial increase in average earnings this year. Payments due under the second phase will come to about 10 per cent of average industrial earnings. This is even higher than the 9 per cent paid under the first phase nine months earlier. By international standards these are very high rates of increase indeed. From a strictly economic viewpoint, there would not appear to be scope for any further pay increases this year.
I am sure that our people now accept that we cannot continue to live beyond our means, nor to award ourselves increases in incomes which are not accompanied by an increased margin of productivity to guarantee the competitiveness of output at home and abroad.
The increases in oil prices have contributed significantly to the cost of living. They have made us and other industrial countries poorer in absolute terms and we have to face the reality that we, as a community, cannot compensate ourselves for this loss simply through increases in incomes. To attempt to do so will drive up the inflation rate further and will leave less advantaged sections of the community worse off. This is the unanimous view of the Finance Ministers of the EEC. Against that background, efforts to provide compensation for the impact on consumer prices of higher oil costs were inappropriate and are even more so now.
The Government at this stage have an open mind about what arrangements should follow the National Understanding. But the dominant consideration must be that levels of pay should be appropriate to the more difficult economic conditions with which we are now confronted at home and abroad. Arrangements which ensure this in the interest of our common well-being will be welcomed by the Government. Arrangements which did not could not be acceptable.
Public sector pay and pensions
The growth in the cost of public service pay and pensions is a matter of serious concern. The 1979 cost, at £1,158 million, represented an increase of 25 per cent on 1978. About £110 million arose from special pay increases payable in addition to the standard increases of the Pay Agreements of 1978 and 1979.
The estimates for 1980 include a sum of £1,387 million for the Exchequer cost of pay and pensions. This includes provision for the second phase of the 1979 Agreement and for the carry-over effect of other increases granted in 1979.
With the exception of some major groups, most public servants will by now have obtained a substantial special increase in pay in the current series of such increases which commenced in 1978. I would emphasise again that these special increases are on top of the generous standard increases arising under the 1978 and 1979 pay agreements. Even in favourable economic circumstances, it would be reasonable to expect that special increases on this scale would take care of any anomalies or inequities as far as public servants are concerned for a number of years to come.
It is therefore particularly disturbing to find fresh demands for special increases—some of them very substantial—coming from groups who have already benefited in the current series of such increases in 1978 or 1979. I would ask those concerned to consider carefully the consequences for themselves and for the public generally of such unreasonable demands.
As I said earlier, there would not appear to be scope from a strictly economic viewpoint for further increases in rates of pay this year. For that reason I am most reluctant to make provision for further pay increases. I must, in prudence, however, make some provision under this heading. I am therefore adding to the expenditure estimates £100 million for pay and pensions. If, in the event, this provision has to be increased, I am determined that we will not have a recurrence of last year's experience whereby such excess expenditure added to borrowing. I shall, if necessary, introduce supplementary proposals whether by way of increasing revenue or decreasing services, to cover any excess costs.
Deductions from expenditure
I should mention at this stage that I intend to deduct from expenditure a sum of £40 million for unspent balances in the hands of Departments.
There is also a relatively small saving to be made as follows. There has been a large increase in recent years in official foreign travel arising out of Ireland's international trading and diplomatic links and membership of various international organisations. I am concerned to ensure, in the interests of economy, that only essential travel is undertaken and that there is no unnecessary duplication of attendance at meetings abroad, particularly those unconnected with our membership of the European Economic Community. I have directed Departments to secure the maximum savings possible in this respect. The amount involved—about £¼ million—may appear small relatively speaking, but it is important as an indicator of the Government's intention to keep taxation at a minimum.
In effect, I have now added a net £60 million to the opening deficit on the current side of the budget.
TAXATION
I turn now to the subject of taxation.
The overall level of taxation in Ireland, at 34 per cent of GNP in 1978, compared with an average of 40 per cent for the other EEC countries. This relatively low level of taxation in Ireland has been made possible only by large-scale borrowing over the past five years to finance current services.
The Government are fully committed to devising an equitable tax system as between each taxpayer and each section of the community. It is not possible to allow each section the tax system of its choice, nor can a complex tax system be changed all at once. The Government will endeavour to ensure that taxpayers will recognise that no one is being disproportionately burdened and particularly that no one, by evasion, passes on his burden to another.
Steps have already been taken in the last two budgets to improve the position of low income taxpayers, in particular by means of large increases in the personal allowances. The proposals in this budget will advance the Government's objectives significantly.
The Government-ICTU Working Party on Taxation have devoted considerable time to devising acceptable and factual bases of comparison of the distribution of the tax burden. These are but the initial steps in tackling the complexities of the matter. In order to assist the Government to assess the problem objectively and to design an equitable tax system, the Taoiseach has proposed a full-scale Commission on Taxation. The Government envisage that the commission would discharge their task with all possible speed and might, by arrangement, provide interim reports on specific tax areas. Significant changes need not await the conclusions of the commission, as today's budget measures will show.
Within the obvious constraints that apply this year, my tax proposals should demonstrate the Government's commitment to equity in the tax system in a manner consistent with the economic and social priorities we must pursue.
INCOME TAX
I will deal first with personal income tax. Of all taxes, personal income tax has most notably become a cause of widespread public unrest and dissatisfaction. I cannot in my Budget resolve all the problems associated with income tax but, when I have finished, I hope it will be clear that I have gone a long way towards an acceptable tax system—indeed probably further than most people would reasonably expect, in the present circumstances. I am satisfied that the need to give justice and fair-play to income tax payers requires that substantial measures be taken now rather than later.
In principle income tax is a fundamentally fair tax system. Its essence is that each taxpayer pays according to his means on a common basis with everybody else in the same position and that those who are better off pay more by an appropriate amount. The tax code also has a wide range of allowances and reliefs to cater for a varying range of social and family circumstances.
It is when the tax system is allowed to drift away from the basic principle I have outlined that the public's notion of fairness and equity is offended and disquiet about the tax system begins to mount. This is an issue which must be faced and resolved.
There are four main problems to which my proposals must address themselves:
First of all, in the light of the recent Supreme Court decision, I have to deal with the taxation of married couples, particularly those where both husband and wife are earning.
Next, I have to tackle the higher tax burden imposed on an increasing number of taxpayers in recent years because income increases have attracted higher rates of tax.
Thirdly, I think there is a need to give further reliefs to the less privileged taxpayers—those with low incomes, and particularly those with social and physical handicaps.
Finally, there has been increasing unrest caused by the difference between the basis of assessment applied to wage and salary earners on PAYE and that applied to other taxpayers such as self-employed. These, as a general rule, pay tax based on profits of the accounting period ending in the preceding income tax year.
Taxation of Married Couples
With regard to the taxation of married couples, the Government are satisfied, in the light of recent developments, that nothing less than substantial changes in income taxation will now suffice. We intend, therefore, to implement our undertaking to alleviate the taxation of married couples. A narrow approach towards effecting the minimum changes to meet the Supreme Court's decision would lead to unjustifiable discrimination against the one-income family, particularly where a married woman elects to care for the family on a full time basis at home rather than take up work outside the home.
Even in cases where both spouses are working, their tax liability, if nothing were done, would vary depending on how incomes were divided between them. There would also be considerable scope for tax avoidance by self-employed and better-off taxpayers, who could now attempt to take advantage of the Court's decision and arrange for both spouses to have an income designed to minimise liability for tax.
To implement the basic principle that taxpayers with the same income and the same family and social circumstances should pay the same amount of tax, the Government have decided to implement now and in full our longer-term plans for income-splitting. This means in effect that all married couples, whether with one or two incomes, will have the benefit of double the personal allowance and rate bands applicable to single persons.
Deputies: Hear, hear.
