Many employees in the private and even in the commercial semi-State sector have voluntarily accepted reductions in wages and conditions to protect their employment. Again, this is not a sacrifice that has been demanded of anyone working in the established public service, although in 1987-88 there were agreed voluntary redundancy schemes. Through a combination of wage rounds and special pay increases, nearly all categories of public servants have enjoyed a substantial increase in remuneration between 1 January 1987 and 1 January 1993, ranging from nearly a third to over one-half in nominal terms compared with inflation of around 21 per cent in that period. In the same period the average industrial wage has increased by less than one-third. The problems and overhangs inherited from the past and, to be fair, some legitimate catching up, all of which have been responsible for abnormally large increases in the overall public pay bill in recent years, will soon be largely ironed out of the system. This provides a unique opportunity to restructure the system of pay determination more in line with what the nation can afford.
The time is therefore approaching for a major reappraisal to ensure that there is a level playing field for all sectors of the economy. We must always remember that the public service is there for the benefit of the community at large, and not the other way around. In Germany in the last month a public sector wage round of 3 per cent has been agreed, at a time when their current inflation rate as estimated at 4.4 per cent. As we know from the experience of the Programme for National Recovery, taking into account the broader picture, including tax relief and interest rate reductions, there can still be real income increases, even when nominal increases are below the rate of inflation.
There is general agreement that apart from continuing low inflation, the other aspect which will have a most beneficial impact on employment is the level of interest rates. I am glad that it has been shown in the past hour that the short term rate has come down to a rate approaching 12 per cent. The current high level of interest rates is choking off investment and in some instances is creating trading difficulties. The threat of any further rise in interest rates has receded since the budget, and there are already signs of some easing of interest rates, notably in the one month rates and in the rates to prime borrowers. The past few days have shown a very clear direction in that regard. We have also succeeded in rebuilding our external reserves into a strong position since devaluation. We did not lose our reserves, as some commentators have claimed. We used them to protect our currency.
The Exchequer borrowing requirement in 1993 is, contrary to expectations, less than £50 million above the outturn for 1992, with the EBR rising from 2.8 per cent of GNP to 2.9 per cent. The purpose of this is two-fold. It is broadly compatible with the Maastricht guidelines, but, more important, in the short term it is designed to ensure that there are no domestic factors to prevent us benefiting from a reduction in interest rates during the course of the year.
The Exchequer borrowing requirement has been criticised in some quarters for being too high, but mostly for being too low. I want to deal with both arguments. Given the rise in unemployment and the once-off factors affecting VAT and DIRT revenues with the coming into effect of the Single Market, it is a remarkable achievement to have held the EBR to under 3 per cent of GNP for the fifth year in succession. The Fine Gael Party, during all its time in Government, could not get the EBR to under 12 to 13 per cent. We will have in 1993 one of the lowest borrowing levels in the Community, below Germany's and way below that of the UK. But once fiscal discipline is relaxed it is very easy for borrowing to get out of hand quickly, and bringing it back down again is a slow and painful business.
We have kept public expenditure under very tight control. At a time of low economic growth and increased social transfers, expenditure tends to rise somewhat as a proportion of national output, and this has happened to a small extent here. Nevertheless, our public expenditure as a percentage of GDP will be the lowest in the European Community this year, on the basis of Commission estimates, and about 7 percentage points below the EC average. There is, therefore, no objective justification for claims that this is a high-spending Government.
The overhang of debt and the need to reduce the debt/GDP ratio, which will be set back a year by devaluation, makes it necessary to restrain expenditure tightly. If we want interest rates to fall, and that must be one of our highest priorities, we have to show a clear commitment to continue tight budgetary control. I reject suggestions that we had scope to borrow up to £200 million more. Any positive employment effects that might have had could have been quickly cancelled out by higher interest rates resulting from doubts about the Government's continuing commitment to sound public finance.
There are no short cuts to lower interest rates, and certainly not a devaluation a month, as proposed by Deputy Michael Noonan. I find it hard to reconcile the new soft option, anti-European policies of Fine Gael Deputies with their former rhetoric. The addition of another £1 billion to the national debt is obviously not a serious consideration to a party that doubled it when it was last in office. If there were any evidence needed that the Fine Gael Party has ceased to be a serious party, this proposal surely provides it. Fine Gael Deputies appear to have abandoned their Christian Democrat principles and become more and more attracted by the floating economic policies of some commentators and a small minority of financial institutions. Deputy Noonan was criticising the Government only last September for not maintaining the Irish pound within a narrower 1 per cent band of fluctuation against the German Mark than that permitted under EMS rules. What a U-turn.
Neither my party nor our partners in Government have ever subscribed to the view that it is sufficient to keep the economic fundamentals right and to leave the rest, and especially job creation, entirely to the market. In times of world depression that is a counsel of despair. During the election the centrepiece of Fianna Fáil's strategy for dealing with unemployment was to give a big boost to public capital investment to stimulate economic activity. The Labour Party adopted a similiar approach. It was a key policy commitment in the Programme for a Partnership Government which has already been honoured.
The public capital programme of £2.4 billion is the largest ever and, unlike the investment plan in 1981, it is not based on increaed borrowing. There is no doubt that a large programme of this kind is very beneficial to employment in the short term, particularly in a recession. It will help to slow down the rise in unemployment, and the Minister for the Environment estimates that up to 9,000 jobs could be created directly and indirectly in the construction industry, which is, of course, overwhelmingly an indigenous industry. It is wrong to suggest that the employment is once-off. Provided the money continues to be there, and it will be, thanks to more than £8 billion in Structural and Cohesion Funds negotiated in Edinburgh, once one project is complete, construction workers will move on to the next. We are raising the level of activity now, when it is most needed, but it will not subsequently fall back.
By investing in our ports, our roads, our railways and by providing adequate water supplies and sanitary facilities, as well as developing our human resources through education and training, we are also improving our competitiveness. Bottlenecks or deficiencies in infrastructure seriously inhibit economic development. Go around to any part of the country, and you will find that improving deficient infrastructure is one of the main demands for action, both from the point of view of improving competitiveness and enticing investment, and from the point of view of creating immediate jobs in construction.
Fine Gael is trying to suggest that this level of infrastructural investment is unnecessary or is not a priority. Its decision in their 1984 plan, Building on Reality, that county roads were not a priority and that there should be no new investment in railways or in the seventies that modern telecommunications were not a priority shows that this is a very shortsighted attitude. The European Commission has a quite different view, and urges governments to follow policies aimed at increasing the dynamism and competitiveness of the economies through the removal of market impediments to economic growth, and at creating the conditions which will prevent stronger employment creation in the medium term.
At the Edinburgh European Council, member states were asked to exploit the margins for manoeuvre available in the budgetary area to implement measures to encourage private investment and to switch public expenditure towards infrastructure and other growth supporting priorities. Most governments in the western world and, in particular, the Clinton Administration, are pursuing this policy, and so are we.
The new Government is proceeding with the establishment of the county enterprise boards. £25 million is provided in the budget with about £130 million coming from the financial institutions. I have always attached great importance to this initiative as a means of boosting small enterprise. It will give local ideas a better chance to be judged by people who know the region and who are sympathetic to local initiative. Increased self-reliance has an important role to play. There was a supplement on Cavan in a newspaper at the weekend, which made the point that, despite few multinationals locating in Cavan, unemployment was lower than elsewhere, because of the amount of local enterprise. Of course, we will continue to need multinational investment, which has accelerated national progress and the development of skills, but we need to fire on two cylinders, not one. Many areas, like Galway today, are a repository of skills that will be both attractive to new foreign investors and that can be used to develop new local enterprises. The Government will ensure that the full resources of the State are brought to bear to help replace the employment lost in Digital, as we succeeded in doing over a period of years in areas where there were very heavy job losses, such as Kilkenny, Limerick, Thurles or Castlebar.
The Government remains committed to the implementation of the Culliton report. Legislation is being prepared to set up the new industrial agencies. The task force presented its final report on 13 January 1993. The recommendations of Culliton have been largely accepted, and in many cases are being implemented. In other areas further work needs to be done.
The budget also provided incentives for investment in industry. We renewed the business expansion scheme, as recommended by Culliton, and abolished the lifetime cap. The new special investment accounts being introduced will provide a further incentive. The Minister for Finance indicated he would be having discussions with managers of pension funds to increase their level of investment in Irish job creation, especially in manufacturing. There will be further measures in the Finance Bill, which will look among other things at the tax treatment of the owner's capital for business startups and incentives for employee investment.
Disappointment has been expressed that the Government has not embarked on more radical tax reform this year. With changes in VAT and DIRT there has already been disruption of revenues. While the effect of the tax reforms over the last five years has been beneficial to the economy and will be beneficial to employment in the long term, no one should pretend that they have had any immediate impact in reducing substantially the level of unemployment. The evidence to the contrary is the 300,000 unemployed.
In fact, there is no evidence that tax reform has any short term impact on unemployment whatsoever. The Progressive Democrats, particularly Deputy McDowell, long peddled the simplistic and fallacious notion that tax reform was the key to solving the unemployment crisis. If he reads Culliton carefully, he will see that the report makes no such claim. At times of economic difficulty reducing the top rate of tax, from which the really well-off benefit most, is not the biggest priority. If you look across the water to Britain, which has the lowest tax rate in Europe for top earners of 40 per cent, it has not prevented unemployment rising to over three million again, and some 40,000 job losses were announced last week. In Ireland, there has been very substantial reductions in income tax, the standard rate down from 35 per cent to 27 per cent, and the top rate from 58 per cent to 48 per cent since my budget in 1989. We did not reverse those rates in the budget, but we did introduce a 1 per cent income levy, so that we could support those without jobs. Income tax yield is projected to increase this year by 6 per cent. It is not too much to ask in solidiarity with the unemployed. When conditions improve, the process of tax reform will be resumed, concentrated on taking those on low incomes out of the net altogether, and substantially widening the standard band.
It is hard to take seriously Opposition criticism of the income levy, a relatively modest and temporary imposition. Both the new Clinton Administration and the German Government have had to impose much greater tax increases on higher incomes or temporary levies on income amounting to 7 per cent. It is said that a levy of this kind takes no account of differences in personal circumstances. That is true, but let us remember that radical tax reform as recommended by the Progressive Democrats would see us with straightforward income tax rates of 25 per cent or 40 per cent, with all or most of the allowances that would recognise differences in personal circumstances eliminated.
Fine Gael seem to forget that in 1983 they introduced a 1 per cent income levy on top of a 5 per cent increase in the top rate of tax. The levy lasted three years until 1986. Totally ignoring the principle of collective responsibility, Deputy John Bruton has attempted to put all the blame on the Labour Party for this. I have no difficulty in standing over the measure today. The arguments about equity might have some force if we were talking about a 10 per cent or 25 per cent levy. When one is speaking about 1 per cent, with an exemption limit of £9,000 compared to only £3,000 in 1983, so that it does not affect the low paid, then the argument is largely theoretical. It will not apply to about 500,000 of the 1.1 million workforce. According to the Department of Finance, incomes are projected to rise by approximately 6 per cent in 1993 so it is not too much to ask for 1 per cent to show solidarity with the unemployed.
We have provided substantial assistance, as we promised during the election, to those with heavy mortgage repayments. The raising of the ceiling to £5,000, the 100 per cent allowance for the first three years, and the temporary 90 per cent allowance for others represents a generous response to the problem. It was right in the circumstances to concentrate the limited tax relief available more on mortgage holders and on the low paid.
Neither of the Government parties believes that our public services should be allowed to run down in order to pay for tax reductions, especially as many services provided are short of funds even as things stand. Post-1989 we restored the level of health spending, and in this budget we provided a further £20 million to deal with waiting lists. Current health spending at over £1.8 billion is now 14.2 per cent of gross expenditure, instead of 12 per cent in 1989.
On the capital side we have provided for 3,500 local authority housing grants. There has been a major increase in child benefit, which will help all families. We have made special provision for the elderly in the budget with an increase in the carer's allowance, the provision of a free colour television licence, and money for the refurbishment of flats in Dublin's inner city. The incomes of all social welfare beneficiaries are being protected and further progress is being made towards implementation of the report of the Commission on Social Welfare. There has been a large increase in the provision for services for the mentally handicapped.
The social measures in the budget are well targeted, and they continue the practice established since the 1989 budget, of doing more than is strictly required for the least well off in our society. As the economy improves, we hope to be able to do more, and we all want to do more.
From Fine Gael on the other hand we hear calls to dismantle effectively the existing social insurance system. How will social welfare be paid for if up to £600 million provided by employers is to be removed? Is the general taxpayer expected to pick up the tab for the employers? In every civilised country employers are expected to contribute towards the pensions of their employees, and to cover sickness and unemployment benefit, should they need them. PRSI is not a tax on jobs. It is a system of social insurance and of social obligation. Ireland has one of the lowest rates of employers' contribution in the EC at 12.2 per cent. Would Deputies like to hear the rate of employers' social security contributions in other EC countries? In Belgium it is 41.7 per cent, France 38 per cent, Germany 17.8 per cent, Italy 50 per cent, Portugal 24.5 per cent, Spain 30.3 per cent. It could not be clearer that the level of social insurance and the level of unemployment are not directly connected. While the rate in Britain may be marginally lower than here, at 10.4 per cent, manufacturing employers in Britain pay 33 per cent corporation tax instead of our 10 per cent. The arguments of Fine Gael do not stand up to scrutiny.
I might be more sympathetically disposed to listen to the argument that lower PRSI would mean more jobs, if there had been a more impressive uptake of the existing PRSI exemption scheme for new employees taken from the live register and of the wage subsidies and training schemes. Of the 15,000 places available on the employment subsidy scheme, where there is a £54 per week subsidy for every new employee, there has only been a take-up of 6,000. For the training scheme paying £45 per week, with funding for 10,000 places, there has only been a take-up of 600 jobs.
A study was carried out in the Labour Market Review by John Sexton of the ESRI 12 months ago which showed that the effect of cutting employers' PRSI was not substantial, when compared with the size of the job creation requirement needed to make a serious dent in unemployment.
The principal demand of the farm organisations during the recent election was that something should be done to raise substantially the tax thresholds for lifetime farm transfers between generations, complementing the EC retirement scheme. This has been attended to straightaway in our first budget. The raising of thresholds and the probate tax provide a general incentive to lifetime transfers.
To sum up, the budget represents a good start to the partnership Government for the following reasons: it delivers the promised boost to economic activity and employment; it maintains the tight budgetary discipline that will enable Ireland to benefit from lower interest rates; it provides the promised tax relief to mortgage holders and keeps tax increases to a minimum; it maintains the incomes of the less well off, and it contains carefully targeted social improvements that are priorities in the programme for Government.
I commend the budget to the House and to the nation.
