The new Programme for Competitiveness and Work does not stand alone. It forms part of a continuous process for change in society in conjunction with the Programme for a Partnership Government, the National Development Plan and the 1994 budget.
I will refer to the economic background against which the programme was negotiated and, in this context, to reflect briefly on prospects for this year.
The prospects for the economy are improving significantly. I expect GDP growth of at least 4 per cent, a rate which when compared with the forecast for the European Union as a whole of about 1¼ per cent, is a healthy prospect.
Allowing for the tax and other changes, which I announced in the budget, real personal disposable incomes are likely to increase by over 3 per cent. Assuming some reduction in the savings ratio, which is currently at a high level, in response to lower interest rates and greater confidence, there should be a strong recovery in the volume of consumer spending. Investment activity should also pick up this year as interest rates remain low and as the buildingrelated increase of over £120 million in public capital spending which I outlined in this year's budget takes effect. This represents a substantial boost to building activity and to jobs in this sector. It should lead to an increase in the volume of building investment this year of at least 5 per cent, with total investment activity expanding in volume terms by about 3¾ per cent.
With the outlook improving in some of our key trading partners, industrial exports should grow by over 7 per cent in volume this year. As in previous years, the increase in exports will exceed the growth in Ireland's export markets. Although import growth is expected to pick up and the deficit on invisibles may widen, the balance of payments surplus should remain in the region of 6¼ per cent of GNP.
Despite recent successes in increasing the share of foreign markets, complacency must not creep in. We must continue to make further gains through improved competitiveness, and through improving our marketing strategies. The Programme for Competitiveness and Work will greatly assist Ireland's competitiveness position. I will return to this later.
The Exchequer borrowing requirement and the general Government deficit in 1994 — at 2.7 per cent of GNP and GDP respectively — will again be low by international standards. While our national debt to GNP ratio remains high, it will resume the downward trend which was temporarily interrupted by the devaluation of the Irish pound last year. Further progress in reducing the burden of the national debt has been recognised by the social partners as a key issue to inform fiscal policy on which implementation of the measures outlined in the programme depends. Continued pursuit of these fundamental goals should also help to keep interest rates low and to enhance confidence of domestic and foreign investors alike in the sensible manner in which we are continuing to manage the economy.
The budget will contribute to our economic performance this year, by building on the capacity of the economy to deliver sustainable economic and social progress. It demonstrates this Government's continued commitment to sound budgetary management. The budget provided a significant boost to disposable incomes for the great majority of taxpayers, particularly the lower paid and in so doing, paved the way for the moderate pay terms of the Programme for Competitiveness and Work. It made further progress in rebalancing taxation and PRSI payments to protect sectors facing significant competitive threat.
This year, I incorporated new supports to business expansion in the interest of supporting employment growth, which is also a fundamental objective of the PCW. By substantially expanding training, work experience and associated programmes, the budget will enable more people to enhance their employment prospects and should raise the levels of skills in the economy. These and many other measures taken in the budget will combine to bring about a substantial addition to the number of jobs which might otherwise have been created during the year.
The recently published labour force survey for April 1993 confirmed what I had been saying all through last year, that the information available to me from tax and PRSI receipts indicated that the employment growth which I predicted in last year's budget was holding up well. While employment declined in every other European Union country except Luxembourg, the labour force survey results show that in the year to April last, employment here grew by 7,000. Taking account of the long-run decline in the number engaged in agriculture, non-agri cultural employment rose by about 16,000 or about 1.5 per cent. The survey results confirm that policy in recent years has been on the right track. At the very least, it can be said that we are converting output growth into worthwhile progress on employment which has been the ultimate objective of policy in recent years. This year we can expect to see non-agricultural employment growth of about 24,000, which after allowing for some emigration should permit a modest fall of about 5,000 in average registered unemployment this year.
Even allowing for the excise duty changes which I made in the budget, I expect inflation to average no more than 2.5 per cent for the year — again well below the EU average. I am not alone in expecting a much improved economic performance this year. There is broad agreement among institutional forecasters and the private financial houses that we are set for a year of strong output growth, significant employment gains and a decline in the number on the live register. The policies of this Government, with powerful support from the social partners, are paying off. I am not being unduly optimistic when I say that the future for the Irish economy in terms of real growth and job creation is very promising.
The new programme spells out the aspirations of the Government and the social partners in relation to public services for the duration of the programme. These aspirations must be seen in the context of paragraph 3.5 of the programme which states that the pursuit of economic stability, on which increased employment is dependent, requires "significantly greater restraint on public expenditure than has existed for the past three years, particularly in relation to current expenditure". All the undertakings in the programme are subject to this requirement.
The areas where the most significant development are to take place are first, employment generation: the Government expect numbers at work outside agriculture to grow by more than 60,000 over the three years of the Programme for Competitiveness and Work. Recognising, however that, while this would match the very best of recent past performance, it does not go far enough. The Government, in addition, will (a) take specific actions to develop small business and start-up enterprises (b) support the further development of the services sector and (c) introduce a community enterprise programme which will, before the end of the Programme for Competitiveness and Work, involve 100,000 people in community-based work, supplemented by work experience and training; second, the area-based response to the problem of social exclusion; third, in agriculture: the Government and the farm organisations have agreed a Programme for Competitiveness and Rural Development which will aim at (a) maximising the contribution of farming, food and forestry sectors to employment and value-added in the economy and (b) maximising the number of viable farms and farm households in rural Ireland at sustainable living standards; fourth, in education, further improvements in pupilteacher ratios and further provision for the disadvantaged; fifth, further progress towards the achievement of the main Social Welfare rates recommended by the Commission on Social Welfare will be an important objective under the programme and sixth, the priorities in the health area will be the Child Care Act, services for the mentally and physically handicapped, the care of the elderly and further improvements in the dental service.
Our overriding economic and social objective is to resolve our critical unemployment problem. This has been confirmed in the most positive way possible in the new programme. Ensuring that taxation policy is pro-employment is therefore essential. This means continuing the process of tax reform, now under way for six or seven years, aimed in particular at increasing the rewards and incentives for working and reducing the cost of employing workers.
It is the Government's policy to continue, within responsible budgetary parameters, to ease the tax burden on earned income and, where necessary, adopt appropriate base-broadening. The 1994 budget set out what the Government regard as the guiding principles for a "pro-jobs" taxation strategy. These same principles are reaffirmed in the Programme for Competitiveness and Work. These concerns underpinned the 1994 budget and will remain the barometer of progress on taxation policy over the coming years. They are: to seek to redress the long-run tendency for “earned income” to contribute a growing proportion of total revenue, focusing available resources on improving the position at lower to middle incomes; to preserve and build on the considerable base-broadening across all major tax heads, achieved during the Programme for National Recovery /PESP period, confining special preferences and incentives to areas where there is a clear economic or social justification and keeping the degree of subsidy involved to reasonable proportions; and to continue pursuing simplification and streamlining of tax legislation and administration subject to the overriding need to maintain effective collection systems, which are fundamental to equity in practice.
The 1994 budget, which complements the new programme, made significant steps in implementing the Government's taxation strategy. It was specifically aimed at lightening the tax burden on earned income. As well as abolishing the temporary 1 per cent income levy, the budget provided for substantial increases in the basic personal allowances and in the standard rate tax bands. These measures will afford relief to all income taxpayers, including those on relatively low incomes.
Moreover, additional measures targeted directly at assisting the low-paid were also introduced. The child addition to the income tax exemption thresholds is being increased by £100 per child. The addition will now be £450 each for the first and second child and £650 each for the third and subsequent children. For example, in future, a married person with four children will be able to earn up to £9,400 per annum or slightly over £180 per week without having to pay any income tax. In addition, the rate of tax at which marginal relief is charged on income slightly above the exemption threshold is being reduced by 8 percentage points from 48 per cent to 40 per cent. This will reduce significantly the marginal rate of tax faced by many low-paid workers. The ICTU and the social partners generally endeavoured to deal with the issue of low-paid workers.
The improvements in this area will mean that some 38,000 taxpayers will either benefit from marginal relief or be fully exempted; moreover, the remainder of the 111,000 taxpayers currently on marginal relief will see their income tax considerably reduced. A low income exemption threshold was also introduced into the health contribution and the employment and training levy. Finally, to help maintain and create employment, especially in labour-intensive sectors, a differential employer's PRSI contribution rate structure was introduced — a reduced rate of 9 per cent will be levied on incomes up to £173 per week in such sectors.
These changes, including those in the PRSI system, should improve significantly the competitive position of firms with large numbers of low paid employees. Deputy John Bruton spoke earlier about this sector. They are in a difficult competitive position but these benefits are geared primarily to assist them.
However, we must all recognise that tax reform is not simply a matter of reliefs, that the strategy behind the tax changes being implemented by the Government involves a reorientation of the overall system to be more employment friendly. This necessarily involves choices and trade-offs. In the income tax and PRSI code, focusing reliefs and reductions on the lower-paid inevitably involves some claw-back elsewhere in the tax code. In the income tax area this involves the confining of tax relief for mortgage interest and VHI premia to the standard rate over time, and making unemployment benefit reckonable for tax purposes. It was also necessary to look to the areas of excise and the residential property tax for some of the funds, which we believe to be justified. Without these trade-offs, the real benefits of restructuring our tax and PRSI systems could not be realised.
I am sure the House will agree that, if tax measures to improve wage competitiveness are to be successful, we must also ensure a receptive environment for investment and an adequate supply of investment capital. Accordingly, the Programme for Competitiveness and Work and this year's budget also focus attention on the need to improve the availability of equity capital for Irish industry in general, and particularly the smaller indigenous business sector. While the general tax policy of restricting reliefs and exemptions so as to favour reduced taxation is the most important plank of the Government's tax policy, I have never ruled out specifically focused reliefs to help develop particular sectors of the economy. In this regard the budget contained a number of measures designed to help businesses to provide more employment.
I do not intend to catalogue all the relevant measures. However, some merit special mention. The budget provides for significant new reliefs in respect of capital acquisitions tax and capital gains tax which will provide a positive incentive to business investment and enterprise. A new business relief is being introduced into the capital acquisitions tax code and the special Capital Gains Tax roll-overrelief has been extended to shares in most trading activities in the wider services sector, whereas previously it applied to shares in BES companies only. A new 27 per cent rate of capital gains tax is being introduced in respect of share disposals in certain unquoted companies, all widely welcomed by all business groups. The company value limit for entrepreneurs' investment in their own company under BES is being raised from the current £150,000 to £250,000. These measures are designed to increase the return from productive investment and tilt the balance in favour of such investment.
The budget paid particular attention to facilitating the establishment and development of small businesses. The VAT registration thresholds for both goods and services are being increased, the current cash basis of accounting for VAT is being extended, and a single registration form will be produced, which can be used by businesses to register for all taxes. In addition, steps are being taken to simplify the tax clearance procedures for public sector contracts. That will have a major beneficial effect on businesses, particularly these that, to date, have had to obtain several tax clearance certificates before engaging in business with State companies and others.
The Government's foremost concern at present is the need to create sustainable employment. With that objective in mind, supporting enterprise in the interests of employment has been a central theme of the new programme and of recent budgets.
On pay arrangements regard has to be had to employment needs and fiscal discipline, first, the need for a concerted approach to tackling unemployment and maintaining existing employment and, second, the underlying need for continuing discipline in the management of public finances. The Government considered that the broad thrust had to concentrate on improving competitiveness through pay moderation, and on aiming for a settlement at a level which would enable resources to be allocated to employment-creation policies. The features of the pay agreement are well known. The special arrangements for the public service are designed to ensure that, in cost terms, pay increases in the public service over the three-year programme and the cost in the first year will be the same as those applicable to the private sector. The public service agreement is for three and a half years, and provides for general increases totalling 8 per cent.
The later starting date, combined with the staggered starting dates proposed in the public service, are designed to provide the necessary space for dealing with outstanding claims or unfinished business under the local bargaining clause of the Programme for Economic and Social Progress. Negotiations on this unfinished business will entail agreement on flexibility, improvements in efficiency and effectiveness and other offsetting measures, and the outcome of any claims will be implemented in four phases during the lifetime of the agreement.
There has been much loose talk about the special arrangements for the public service which I would like to dispel. During the currency of the Programme for Economic and Social Progress pay agreement, many private sector employments concluded settlements with their workers under the terms of the local bargaining clause, which applied for the second year of the Programme for Economic and Social Progress. Public service workers were specifically debarred under the terms of the Programme for Economic and Social Progress from making claims until the third year of the agreement starting from 1 January 1993. While practically all groups of public service workers lodged claims last year, only a very small minority were dealt with and it is unfair to say that the public service received all these increases.
By any standard, an agreement which limits the outcomes of negotiations on outstanding claims for special improvements in pay or conditions of public servants to 3 per cent, over three and a half years, is a reflection of the genuine concern of the social partners for the very special needs of the economy, to ensure that public servants play a real part in improving competitiveness — expressed in their case in the cost of the vital services they provide and in the efficiency and effectiveness of service.
There has also been much loose talk about the special agreement reached on the 1 per cent to be paid on 1 April next. I answered a written question on that issue yesterday. The intention is that outstanding claims for each group of employees will be discussed and arrangements made to process them, on the basis of the options set out in the agreement. When that has been done, 1 per cent of the basic pay of the group concerned from 1 April 1994 will be available either for payment then, if the group concerned so desires, or for use in any subsequent negotiations. While the payment is available to every group pursuing an outstanding claim under the Programme for Economic and Social Progress, it must be offset against the outcome of the subsequent negotiations.
We will probably have an opportunity next week to discuss some of the comments made in the course of the debate about Structural Funds and the ongoing controversy. Deputy Harney referred to statements I made and Deputy Yates raised this issue outside the House. I hope we will be able to deal with this issue next week. During the week I outlined in detail the progress of the discussions underway and the Government's aspirations during the life time of the programme. I would be concerned at any remarks made outside or inside the House that imply I did not acknowledge what was agreed in Brussels last October.
At the press conference on 9 December 1993 I said that the indicative allocation of Structural Fund aid for Ireland for the period 1994 to 1999 made by the Commission on 21 October was less than the figure on which the National Plan was based. I also said at the press conference that this shortfall in European Community aid has been taken into account by the Government in settling the 1994 Estimates in the Public Capital Programme. The assumption underlying the Public Capital Programme and the estimates is that Exchequer and EC spending on areas covered by the plan will be £130 million less than the plan projections. My remarks were fully reported in the media. This is a serious accusation by a Member of the House and one I deny. The record shows that not alone did I acknowledge what was said in regard to the period 1994-99 but subsequently provision was made in the Book of Estimates for the reduction. The departmental Estimates for 1994 reflect that reduction across the board although not on a pro rata basis.
As recently as last Friday, in a radio interview, I made it clear that there was a shortfall in EC aid and that there would have to be adjustments in EC aid and that there would have to be adjustments to the proposals to be included in the community support framework. This did not deal only with 1994 but with subsequent years. On "Morning Ireland" Mr. David Hanley asked me whether I would have to drop £800 million. I replied that was true because the overall level of these funds had already been settled last October.
The record and my statements over many months are clear and as Minister for Finance I cannot allow statements made either outside or inside the House to go unchecked.