The budget this year has an important extra dimension to its overall purpose. In addition to the normal economic and fiscal role, this budget starts to implement the new Programme for Economic and Social Progress, as the first segment of our new ten year strategy to transform Irish society — and place Ireland firmly among the advanced European nations — by the turn of the century.
The budget was formulated against a difficult international background, which has created world-wide political and economic uncertainty. There has been a considerable slowdown in the world economy in recent months, with definite signs of recession in some of our major trading partners. The war in the Gulf; and doubts about the outcome of the GATT negotiations are having an unsettling affect. This budget, therefore, had to be constructed in a way that would achieve three broad strategic objectives.
First, we were determined that the steady economic and social progress of the last four years and the improvement in the public finances would be continued. Secondly, we wished to begin inplementing the Programme for Economic and Social Progress by making the necessary provision for the steps to be taken this year and in preparation for future years. Thirdly, the implications for Ireland of the uncertain international situation clearly demanded that we adopt a careful and prudent approach to the budget and especially to our financial and economic projections.
This budget continues the policy firmly established in recent budgets, of reducing borrowings to very low levels, of tax reform and reduction, and important improvements in social provision for the vulnerable and disadvantaged in our society. We have been able to sustain some progress on all these fronts, despite the deterioration in the international economic climate and the consequent prospect of a slowing down in our own rate for growth.
The budget, is seen by the public as striking the right balance for our current circumstances. There has of course to be a degree of caution, because of the world situation and the possibility that assumptions will not hold good, that world events, and particularly the tragic war in the Gulf, will give rise to further problems. It was not an occasion for taking unnecessary risks. The important thing is that we have not allowed the uncertainties to divert us from what we know to be the right way forward; from sticking to our successful, proven, policies; from holding a steady course through uncertain waters.
To those who, before the budget, thought we could not hold the line, let me state clearly: there has been no halt to budgetary discipline; there has been no halt to tax reform; and there has been no halt to social progress. Instead, we have moved forward purposefully in all these areas and have actually expanded our agenda. The budget has delivered solid benefits, while holding responsibly to discipline.
This budget clearly confirms and continues our policy of sound financial management. That cannot be disputed. The objective is a current budget deficit of 1 per cent of GNP and Exchequer borrowing of 1.9 per cent. Outstanding progress has been made over the last four years in reducing the current budget deficit, Government borrowing, especially foreign borrowing, and the ratio of national debt to national output. Year after year the outcome at the end of the year has been better than the targets we set in the budget, clear proof of consistent good mangement.
In the four year period to 1990 the current budget has been brought down from 8.3 per cent of GNP in 1986 to 0.7 per cent last year. This year, it has been set at 1 per cent and the Government have undertaken to bring it into broad balance by 1993. Similarly, Exchequer borrowing has been reduced from 13 per cent to 2 per cent of GNP, or in money terms from £2,145 million in 1986 to £462 million in 1990. I remind the House that these borrowing figures, both last year's and this year's, are the lowest for over 40 years.
I would like to stress also that the actual amount to be borrowed this year will in all probability be substantially below the official target, we have set, because of the sale of a majority stake in Irish Life. While this will, of course have little effect on the underlying borrowing level, it will mean that there will be little actual addition to the national debt this year, with subsequent savings in interest in future years.
Without continued reduction of the burden of debt, all our aspirations will be frustrated. This is why the Government considered it essential, even in the difficult circumstances of this year and despite many conflicting demands, to continue the downward pressure on borrowing levels. It was important to signal our determination to hold on to the gains that have been made and to continue the process, until our goals have been achieved. With borrowing levels rising in Germany and Britain, our decision to continue to reduce borrowing has sent a strong positive signal of our resolve to financial markets everywhere around the world.
Since 1988 increases in the national debt have been minimal. Today it stands at just over £25 billion and the foreign debt has actually been reduced from £9.7 billion in 1987 to £8.85 billion at the end of 1990. The debt/GNP ratio fell eight percentage points last year to 111 per cent, making a drop of 20 points from its peak in 1987. Further progress will be made this year. We are on target for reducing it towards 100 per cent of GNP by 1993. Our longer term target is a level more in keeping with our EC partners.
Service of the national debt, despite the record reduction in annual borrowing that has been made and the savings achieved by better management of the debt portfolio, has nevertheless increased from just under £2 billion in 1986 to £2.4 billion in 1991. Looked at in one way, that is a significant containment compared to previous years, but it continues to be a massive overhead, which remained a major obstacle to our economic and social development.
We have, therefore, now established a National Treasury Management Agency, directly responsible to the Minister for Finance, but operating outside traditional Civil Service structures in a strictly competitive market environment. The agency will utilise the most sophisticated tools of debt management in order to achieve maximum savings on debt servicing.
The Book of Estimates is the basis of the budget. That is where the quality of a budget is decided. The Government subjected the Estimates to detailed examination and assessment again this year. The key indispensable element in the improvement in the public finances since 1987 was the control of and the reduction in Government expenditure. There should be no doubt about that. Other factors helped but that was the core element. The level of Government expenditure has been brought down from around 55 per cent of GNP in 1986 to around 41 per cent this year, a fall of 14 points. I do not know of any other country in Europe or in the OECD in the past 30 years, which has succeeded over the relatively short space of four years in making a downward adjustment of that magnitude.
Subsequent to the publication of the 1991 Book of Estimates in December last year, the Government carried out a further final rigorous review of expenditure in every Department. This produced further reductions of £33 million which are shown in the budget table. This was achieved despite the fact that in many sectors expenditure had to be increased in order to draw down Structural Funds.
There is no question of allowing Government expenditure to rise again as a proportion of GNP above the present level of a little above 40 per cent. Improvements in services will have to be paid for out of economic growth, which has also to provide the means for easing the tax burden and maintaining a steady improvement in the public finances. I wish to categorically reject the suggestion that the programme involves any relaxation or return to the days of big spending. There has been no policy change whatever. Instead, we have reinforced and strengthened our medium term targets.
There has been some suggestion by certain commentators that the alleged cost of the programme raises the spectre of a return to high borrowing. But if the record is examined, most of those who are sceptical of the new programme were equally sceptical about the Programme for National Recovery in 1987 and its implications for borrowing. The success of that programme over the last three years proved them wrong. I would not like respected commentators to misread the situation and this Government's determination a second time. The Programme for Economic and Social Progress is a model of economic, financial, and social responsibility.
Those for whom the size of the national debt and borrowing are the main concern should, in fact, welcome the agreement reached on a new programme and the stability it ensures in the economy and the public finances. The truth is that the Government's success in dealing with the public finances and reducing debt and borrowing since 1987 can in large measure be attributed to building a consensus around a number of key objectives, allowing balanced progress to be made on the public finances, employment, tax reform and social equity.
A good deal of the critical comment outside this House has focused on the issue of public service pay in recent times, both before the new programme was agreed and since. Some economic observers talk about the public service as some kind of impersonal body isolated from life's realities, unnecessarily absorbing a large slice of the country's resources. The reality is something totally different. For the most part the public service is made up of staff who provide the services to the community which everybody, including the commentators themselves, would accept and demand as being an essential part of the type of caring democratic society that we all cherish.
When we refer to the public service, we are talking of the doctors, nurses and other staff who provide the health services, teachers who educate our children, gardaí and soldiers who provide security for us all and who maintain law and order, welfare officers and social workers who deal with the unemployed and others who are disadvantaged, and so on, not forgetting those who have the task of raising the revenue needed to meet the cost of all these services. These members of our national community perform vital functions and the overwhelming majority are highly qualified and dedicated people. They expect to be treated as fairly as possible by the community they serve in terms of remuneration, reasonable account being taken of the rates available outside the public service, with due allowance for the capacity of the public finances.
Indeed, the crucial question is how, as a country, we can afford public services of the size and quality we aspire to without incurring levels of taxation which are unsustainable and damaging to the economy as a whole. The Programme for National Recovery attempted to provide a balanced response to that key question. There was an acceptance that the numbers in the public service would have to be reduced significantly, that economies should be effected, especially where there was an overlapping of functions between different agencies, and that greater efficiency and better management should be promoted and achieved. In the period 1987 to date, public service numbers were reduced from 217,000 to 199,000; the efficiency audit group were set up; major efficiency studies in Office of Public Works and the health area were completed and the new system of administrative budgets was developed. There was a significant rationalisation of State bodies, and a substantial investment in technology took place with the result that a number of our larger Departments are now as technologically advanced as many of the most progressive private sector companies.
Special pay increases arise from independent arbitration awards on claims for particular groups. Under the Programme for National Recovery, there was agreement by the public service unions in the national interest that a large amount of the special pay awards would be deferred from 1987 to 1991. This agreement was of very significant benefit to the Exchequer for the critical period of the Programme for National Recovery. It means, however, that a major portion of the cost of these different specials have to be paid in 1991, in addition to the cost of the general pay increase — 4 per cent — provided for in the Programme for Economic and Social Progress. For 1991, therefore, a total of £245 million is being provided for pay increases — £54 million in the published Estimates and £191 million in the budget. That is a major increase with which we have to deal.
The overall provision for the Exchequer pay and pensions bill in 1991 is, therefore, £3,422 million, an increase of 8 per cent over the 1990 provisional outturn. However, in the new programme there will be a further moratorium on all new claims, and the restrictions on local bargaining including the limit of 3 per cent will not apply earlier than 1993. The public service unions have agreed again to the same type of procedure in this programme as they agreed to in the Programme for National Recovery.
Nevertheless, the rising cost of Exchequer pay and pensions presents a major problem in the management of the public finances and in the framing of any budget. At the same time, public servants are entitled to reasonable standards of remuneration and conditions of service relative to the private sector. The only way to reconcile these apparently conflicting demands must lie in consistent and unremitting efforts to limit overall numbers in the public service by better management, increased efficiency and increasing use of technology. The new programme provides a clear framework in the memorandum of understanding within which this greater efficiency can be negotiated and achieved.
The Programme for Economic and Social Progress, which this budget starts to implement, is the best long term strategy for attacking in a coherent way our persistent unemployment problem, including long term unemployment. It is a comprehensive programme for development, and the budget provides for the Government's special commitments under the programme in 1991. More than that, it ensures the continuance of the basic underlying financial and economic conditions which make growth and development possible, and from which the defeat of unemployment will in due course follow.
In this budget and in the new programme, the interdependent relationship between economic development and social progress is clearly stated and emphasised. Arising from the programme, the scope of the social provisions of the budget has been broadened to include health, education and housing, with continuing concentration on the problems of disadvantage and of low income families.
The critical achievement has been to renew the consensus between the social partners and to develop a new and more ambitious strategy for the next three years and extending to the end of the decade. This firmly establishes the consensus approach to our economic and social affairs. It is this fundamental change in the national ethos and the enormous unquantifiable bonus that this brings right across the board that the critics fail to take into account in their restricted evaluation and assessment of the programme. The fact that we can agree is more important than the precise detail of what we agree about. Once the consensus is there, the targets, the projections and so on, if shown to be unrealistic or unattainable, can be adjusted by agreement. The national consensus provides the basis for a sustained renewal of confidence, increased investment and higher employment, all within the framework of a sound economy. Its benefits continued to be reflected in the economic achievements of 1990, and indeed in the cumulative advances that have been made since 1987, a situation which has caused the English newspaper, The Guardian to say about the Irish economy that “amazing things are happening in Ireland”, or the Annual Economic Report of the EC Commission to state in its chapter on convergence that “the most spectacular results were achieved in Ireland”. The critics do not seem to understand the enormous and inestimable economic benefit that flows from the atmosphere created by consensus, industrial peace, certainty in planning and a spirit of co-operation.
At the most recent ECOFIN Council, the President of the EC Commission, Jacques Delors, praised Ireland's efforts to redress its economy since 1987, and said — this is important — the reason for our success was through sticking to a rigid programme of fiscal management in agreement with the social partners.
The year, 1990, was the fourth year of sustained economic progress, further consolidating the recovery that began here in 1987. For the second year running, we had exceptional economic growth, close to 5 per cent, the best performance in ten years, and also the highest growth rate in the European Community. In the period 1987-90 our GNP has grown by an average annual rate of 4.25 per cent. From being well under two-thirds of the Community average of national income per head five years ago, we will be approaching 70 per cent by 1991, demonstrating that a process of convergence is taking place. We are catching up.
In 1991, we are anticipating continued growth of 2.25 per cent. Some of the criticism of the budget is based on the suggestion that this projected growth rate is over-optimistic, and that a shortfall in revenue will throw the budget off course during the year. This is a fairly standard criticism, and in recent years has invariably been proved unfounded.
I do not accept that the economic forecast underlying this budget is too optimistic. A range of relevant forecasts — issued this month — suggests GNP growth rates from 1.5 per cent to almost 2.5 per cent. Our post-budget forecast, at 2.25 per cent, falls comfortably within this range. In general, over the years the official Department of Finance Estimates have proven to be the most accurate, probably because they are more directly related to the final make-up and impact of the budget. Some private sector post-budget forecasts envisage domestic output growth of 2 per cent or more, which is broadly in line with that underlying the budget.
The view taken of external growth is one crucial element in any macro-economic forecast. The forecast of Irish economic developments assumes external growth as projected by the European Commission in December. Recent reductions have brought world oil prices well below the level the Commission then assumed. However, our economic forecast makes the prudent assumption that any beneficial effects on world growth of lower average oil prices would be offset by the negative effects of the greater uncertainty brought about by the Gulf War.
An essential difference in the budgetary context between the various forecasts relates to investment propects and expectations for construction. In the short term some investors may be tempted to defer decisions because of the uncertainty induced by the Gulf conflict. On the other hand, investment this year will continue to benefit from the EC Structural Funds, and business investment should benefit as industry gears up for the Single European Market. Taking into account the overall budgetary stance and its various specific measures, an estimate of the order of 3 per cent volume growth for the construction industry is scarcely unreasonable.
The very major economic uncertainties facing the world are unfortunately a fact of life. They pose particular problems for countries which, like us, depend on external trade and, critically, on imported energy, but Government cannot wait until the outlook becomes clearer. Assumptions must be made, and budgets formed and implemented even as events are unfolding. Those assumptions must be as realistic as circumstances may permit but, on the other hand, we must not over-react to international uncertainties. One of the early effects of the Gulf War, unexpectedly, was to bring oil prices down. We should not underestimate the worth of the progress made at home and the capacity it provides to withstand adverse external developments now as against our previous capacity. Our workforce is skilled, educated and motivated, our economy is competitive, the new programme ensures industrial harmony, over the years immediately ahead. I believe that we are capable of progress this year, despite the uncertain external conditions that now prevail.
The suggestion that the predicted increase in tax revenue is optimistic in relation to the economic forecast does not stand up. Revenue is predicted to represent the same percentage of GNP in 1991 as in 1990. Put quite simply, the budget figures imply that we expect revenue, in aggregate, to grow in line with money GNP in 1991.
Unlike some previous occasions, we have experienced fast growth, while maintaining a low level of inflation. Low inflation growth means that gains made should be sustained. It is a remarkable achievement that, despite the recent oil price shock following the Iraqi invasion of Kuwait, inflation in Ireland has nonetheless continued on a downward trend, ending the year at 2.7 per cent among the lowest in the European Community, compared with an inflation rate still close to 10 per cent in Britain. In 1991, we are expecting a rate of inflation in the region of 3 per cent, a reduction by nearly ½ per cent on the average for 1990. This position is in sharp contrast with our experience in the two previous oil shocks. Whereas very often in the past decade budgets contributed substantially to annual inflation, the present budget will have a negligible impact on inflation of 0.1 per cent. Likewise, the pay rises envisaged in the new programme are fully consistent with the maintenance of low single figure inflation.
A firm exchange rate policy has helped us to secure low inflation, and that in turn has enabled us to maintain over a four year period, and into the future, a stable exchange rate which is of fundamental importance in the economic and financial situation. In March 1987, the Irish pound was worth around 2.67 DM. Today, four years later, it is still worth around 2.67 DM, give or take a pfennig. Irish businesses, which borrowed DMs, will have gained, as have German investors who have bought Irish Government bonds. In contrast with earlier years, we have succeeded in establishing a firm link within the European Monetary System to the currency of the strongest economy in Europe. This is good preparation for full participation in economic and monetary union. This has also enabled us, for the first time ever, over the past two years to keep interest rates several points below British interest rates, although of course, internationally, interest rates remain high.
The uncertain international background makes it particularly difficult to forecast the trend of interest rates at present. Last week we saw pressures arising from German unification pushing up official interest rates by ½ per cent in Germany, while at the same time weakness in the US economy led to a cut of ½ per cent in the US discount rate. In budgetary terms, these movements are not significant, given the magnitudes involved in the budgetary aggregates. In any event, the increase in official German interest rates has, so far, had little impact on market rates, even in Germany itself.
Given the extent to which emigration can fluctuate with the economic fortunes of the UK and the US in particular, the real measure of progress in our economy is the trend of employment in Ireland. The basic aims of Government economic policy are to provide the conditions for a substantial and sustained increase in employment, to encourage investment for this purpose, and to act directly to bring jobs on stream where possible. The right financial conditions for investment, tax reform, social policy, specific measures in the different employment sectors, can all contribute to a growth in employment. The budget will on this occasion directly create some employment; in education, community health care, tourism, and construction.
Net employment increased in the three years to April 1990 by 40,000 and by a further significant amount in the course of last year. Emigration declined by 15,000 in the year to April 1990, and the signs are that there has been a further signficant fall since. Unemployment was brought down from its peak of over a quarter of a million in the winter of 1987 to 215,000 last May, but because of the fall in emigration it has increased somewhat since then. It is also encouraging that unemployment among school leavers has continued to fall. The best strategy to increase employment and to reduce unemployment is a sustained high level of economic performance, as well as targeted measures following the approach recommended in the new programme.
A problem in our economy a few years ago was the absence of a positive link between economic growth and employment. I am sure a number of Deputies will have heard me say from time to time that this was a dilemma which we did not seem to be able to solve and that we did not seem to be able to translate economic growth into employment. Fortunately, that scene has changed. Research has now shown that one of the most significant changes brought about by the Programme for National Recovery was the re-establishment of a positive link between growth and employment. Since 1987, every 1 per cent growth in output is producing a rise in employment of two in every thousand. This new and positive link between output and employment will continue under the new programme, which maintains the low inflation competitive conditions first established by the Programme for National Recovery.
The new programme, carries forward the approach of its predecessor to employment creation; 20,000 new jobs are to be created each year in manufacturing industry and the international services, with carefully targeted incentives and selective development measures. An additional 5,000 jobs on average are being created in tourism. Objectives for the construction industry, the marine, forestry and commercial State companies are also set out.
Employment in Ireland primarily depends on our success as a trading nation, in relation to both goods and services. Our achievements in the last four years have been outstanding and unprecedented. The surplus on both the balance of trade and balance of payments was continued for the fourth year in succession in 1990, an unprecedented performance for the Irish economy, and the balance of payments surplus is likely to remain near its 1989 level, due to an improved balance on services, a slowdown in profit repatriations, and the increase in EC transfers.
The level of investment, which is the key to employment, increased by about 10 per cent for the second year running. This is the best performance for at least a decade, and puts us back at or near the top of the European league. The new programme is intended to maintain the conditions here for a strong and positive investment climate over the coming decade.
Ireland continues to demonstrate that it is a very attractive location for major overseas investment. Many leading international corporations at the forefront of technology have decided to locate their European manufacturing operations here. The fact that high-quality corporations such as Intel, Motorola, Maxtor, Seagate, Brother, Fujitsu Isotec and Yamanouchi, established in Ireland during 1990, rather than anywhere else in the EC, shows that our economic criteria are right for the establishment of successful modern technological enterprises, including the best and brightest young workforce in Europe. That is the advantage of having a good, bright, highly skilled and well-trained workforce.
With the International Financial Services Centre in Dublin, the Government have successfully pioneered a new development which will make the city an important financial centre in Europe; 150 companies, including some of the world's leading financial institutions, have already committed themselves to locating in the centre, creating 2,500 jobs. The time limit for approvals of new firms has been extended to the end of 1994, and the Finance Act will extend the 10 per cent rate of corporation tax to the end of the year 2005. The 10 per cent rate of tax for firms in the Shannon Customs Free Airport Zone will be similarly extended to 2005.
While more than half of all new manufacturing jobs were created in the past three years in Irish-owned companies, there is an increasingly urgent need to build more such companies with the scale and scope to compete in the Single Market. The firms which will get priority from the State agencies will be those which show a clear commitment and ability to achieve growth in excess of £2 million turnover. In addition, the dynamic contribution to job creation seen for the first time from some of the State companies will continue to be fostered and supported. Ambitious investments in companies, such as Top Tech and TEAM Aer Lingus, are role models for other joint-venture developments within this sector of Irish industry.
Small business is also a vigorous part of the industry scene. Over one-third of the sustainable new jobs in the last three years were created by small firms, which supply £3.5 billion worth of goods to overseas companies in Ireland. The renewal of the business expansion scheme, now firmly focused on the smaller company needing equity finance, will contribute to fostering and nourishing the spirit of enterprise, which is critical to achieving a regional spread in our job-creation work.
The construction industry has also shown strong growth over the last two years, leading to a substantial increase in employment. The number at work in the sector should be about 10,000 higher this year than in 1987.
New industrial investment, growth in tourism, the revival of the housing sector with the highest level of completions since 1983, urban renewal, and increased Structural Funds which have allowed a 5 per cent increase in the public capital programme affecting the building industry in 1991, are all contributing to a much more healthy building industry as well as the maintenance of a climate of confidence in a sound economy. The budget also contains measures to boost the voluntary housing sector, and retains "section 23" relief for one final year. Predictions last year, however, that there might be an overheating in the construction industry fuelled by the Structural Funds, have proved groundless.
Tourism has enjoyed four successful years in a row, with growth rates of between 12 and 15 per cent far in excess of the international average, fully justifying our decision in 1987 to give tourism a much higher Government priority. We aim to create an additional 15,000 tourist-related jobs by 1993. It is one area in which heavy new investment has been in progress since 1987, which will continue through to the end of 1993 with the help of Structural Fund assistance. However, given that tourism is one of the sectors that could be adversely affected by the Gulf War, an extra £1 million has been provided for marketing promotion by Bord Fáilte in the budget, into markets such as continental Europe that have performed strongly in the last four years, with a doubling of the number of visitors.
Two other areas that have shown considerable growth potential are the marine and forestry. Employment in the fishing industry is set to increase by a further 3,000 over the next three years. Forestry planting has almost doubled to nearly 20,000 hectares in 1990, mainly due to a huge increase in private sector planting, and will be increased to a level of 30,000 hectares by 1991.
I think everybody knows that our farmers are having a difficult time. In nominal terms, income fell by some 5 per cent or so last year. When account is taken of inflation and the net interest position, the real drop was well in excess of that figure, but it must be pointed out that that was a reduction from a relatively high plateau in 1989 when incomes in farming, in nominal terms, were 51 per cent higher than in 1986. Farm incomes therefore in 1990 are still about 28 per cent above the 1986 level. In the difficult circumstances prevailing since last summer, the Government sought to limit the fall in farm incomes by obtaining increased EC intervention purchases, and through earlier payment of headage grants.
The new programme recognises the central importance of agriculture to the Irish economy and the need to maximise its contribution. While the protection of the livelihood of farmers must to a great extent be negotiated at EC level, a number of specific measures agreed to in the programme are being implemented in the budget, including the bringing forward to 1991 of the increase in headage rates scheduled for 1992.
Farmers, of course, do not live apart from the rest of the community. From the point of view of their farms as business enterprises, they will benefit from overall economic improvement and, in particular, from low inflation and interest rates. Farm families will benefit too, with other families, from the improvements in the budget and the programme in education, health, community care and social welfare.
An essential component of the new programme is a firm commitment to the future growth and development of our agriculture industry and the prosperity of our farmers. In my view, both of these are necessary not only in the interest of keeping an equitable balance in our society but in the overall national interest also. Agricultural output and the food industry make a massive contribution to the economy, both domestically and externally. Of equal importance is the need to maintain a viable and vibrant rural population based on the family farm as part of our basic social structure. It is also important for the preservation of the countryside and our natural environment. Deputies will be interested to know that in the course of a conversation recently among European leaders, I found that there is a fairly widespread commitment to this concept and agreement that it must be a key element in any reshaping of European agriculture.
A major debate is now under way on the reform of the Common Agricultural Policy, and the EC Commissioner, Mr. Ray MacSharry, has been outlining radical reform proposals, which involve a considerable switch from farm price support to income support, concentrated on the smaller and less intensive farmer. The philosophy behind these reforms is that substantial reductions in Community support will be inevitable over the foreseeable future and that, in those circumstances, small scale producers will have to be protected. The objective is to maintain the fabric of rural society by helping retain the maximum number of families on the land. We have no problem with the philosophy, indeed we welcome it, but how it is to be implemented could create significant difficulties for us. Our task will be to ensure that there is no damage to the vital interests of Irish agriculture as a modern viable commercial industry.
In adapting the Common Agricultural Policy, we will be insisting that smaller scale producers receive adequate protection, going beyond socio-structural aid and built into the market mechanism. The right balance has to be struck. The future development of rural society and of a competitive food industry demands the continued viability and participation of the modern and progressive commercial farmers, whose contribution is vitally important to us. The Community must ensure that competition and efficient commercial farming on a reasonable scale is not undermined in the policy changes which will eventually emerge. Therefore, we will be insisting that full account must be taken of the diversity of Community agriculture and of economies like ours, particularly dependent on agriculture, and that adequate, Community-funded compensation for producers and regions adversely affected is provided, in whatever proposals emerge from the Commission on Common Agricultural Policy reform and on the Community's response to the GATT negotiations.
One major long term objective of tax policy must be that Ireland has a fully competitive tax system compared to other countries in relation to all key areas of taxation. This must be accompanied by the creation of equity throughout the entire taxation system.
Our commitment to tax reform is being pursued. Tax reform to most people means tax rate reductions. We have accepted for some years now that rates of taxation in our main revenue-earning taxes — Income Tax, VAT and excise duties — are generally too high. We have begun adjusting them and in the process have put many hundreds of millions of pounds back into taxpayers' pockets: £800 million in income tax alone over the past few years. This is right both from the viewpoint of the domestic incentive to effort and the onset of the European Single Market in 1992. The resources generated through taxation are not excessive by international standards. It is the way the burden is structured that gives rise to concern. Accordingly, we have committed ourselves to a programme of major — even radical — reform of the structure of taxation, which is continuing in this year's budget.
Over the past few years, breaking the trend of more than 20 years, the burden of taxation, both direct and indirect, has been substantially reduced. In the area of income tax, the changes made have exempted many thousands of taxpayers from any liability. Through broadening the bands, especially in 1988, the proportion of taxpayers on the standard rate has been brought to over 60 per cent. The standard rate of tax and the top rate have been progressively reduced. In three budgets, six points have been taken off each. The important thing is that progress towards the objective of a 25 per cent standard rate and a single higher rate of tax is continuing to be made, despite the difficult conditions facing us this year.
This budget continues to give effect to our policy of steadily improving the position of the lower paid. The exemption limits and the allowance for the third and subsequent child have been raised. Significant improvements in the family income supplemement, the special minimum wage increase in the new programme draft pay agreement, and the extension of PRSI to part-time workers are all part of a consistent approach to helping this section of our society, whose situation requires special priority treatment. These changes for the benefit of those whose family situation is particularly difficult are also reflected in the new provision for persons bereaved and the extension of the PAYE allowance to persons living on this side of the Border and working on the other side.
The tax base has been substantially broadened in this budget. The business expansion scheme is being redirected. The business expansion scheme has served a purpose of stimulating investment and employment, but its cost is high, and we could not afford the rising costs of the scheme if we were to take further action this year to reduce the main rates of income tax. I just could not afford to bring in these improvements in the rates of income tax and at the same time bear the increasing costs arising from the business expansion scheme. There will, undoubtedly, be grounds for complaint that this or that valuable scheme providing employment will not now be able to go ahead or that the sudden cutoff point is unfair to individuals, and these we understand.
I would like to take this opportunity to pay a special tribute to the dedication, professionalism and integrity of officials of the Department of Finance. These qualities and the range of modern skills which they can deploy in support of the Government's efforts to transform the Irish economy have been of crucial importance in everything that has been achieved. Their performance during the Irish Presidency and in the ongoing EC negotiations has been superb. The Government have not been and are not now prepared to engage in irresponsible tax cutting of the type that caused major disruption in the British economy, while postponing the elimination of the current budget deficit indefinitely. The budget is decided and produced by the Government, and any criticism or complaints about it should be politically directed at the Government in accordance with the best traditions of our parliamentary democracy.
