My main concerns about this budget include projected borrowing of 1.5 per cent at a period of peak growth which leaves too little headway to meet European Monetary Union requirements when growth declines and Structural Funds begin to dry up; the national debt under the policies of this Government is scheduled to rise by a further £2.2 billion by 1999; even after yesterday's announcements, tax levied by the rainbow coalition in its three budgets will have risen by over £2 billion, while day to day expenditure is up by £1.764 billion or 21 per cent; for single workers below the average industrial wage — in most cases where both spouses are at work, even though one may be on a small income — the marginal rate of tax and PRSI remains at a penal 55 per cent, much heavier than the tax levied on special savings accounts, deposit interest or capital gains.
The Minister for Social Welfare is aware that special personal investment and special savings accounts are levied at 10 per cent, deposit interest accounts are levied at 27 per cent and capital gains tax is levied at between 26 and 40 per cent. However, a person in employment who currently earns below the average industrial wage — approximately £13,600 — and receives a wage increase or an increase under Programme 2000 will thereby enter the £14,000 wage bracket and their earnings will be levied at the 55 per cent rate. The Government appears to be providing incentives for people who invest their money or do little or nothing while those in normal employment must pay tax at a rate of 55 per cent.
My final concern about the budget is that there is little incentive for the long-term unemployed or those involved in small business. The long-term unemployed seem to have been forgotten in the budget speech, and the documents attaching to it, which we had an opportunity to examine overnight. Small business is again ignored, to the disgust and annoyance of those groups that represent it.
While many of the items in the budget are welcome, they are no big deal. While we are glad that people are receiving some overdue tax reliefs which they have, at long last, wrung from the Government, they deserved much more. I can understand the satisfaction of trade unions and farmers at seeing commitments in the programme coming through. I do not begrudge my good friend and successor, the Minister for Finance, his day in the sun. However, I have grave reservations about the economic strategy, or the lack of it as Deputy McCreevy outlined yesterday, in the budget.
A major opportunity was lost before budget day by not containing expenditure. The Minister could have doubled what he gave back, or spread it more evenly over this year and the last two years, had he stuck to his own self-imposed targets for expenditure, instead of exceeding them by £500 million. He could have been more fiscally responsible at the same time. As far as the good points are concerned, Fianna Fáil had at least as big an input into this budget as Fine Gael. This year's budget, at the end of what has been a productive Dáil since 1992, of which we can all be proud, represents a small sample of the fruits of the sustainable boom which the Fianna Fáil-Labour partnership Government created in 1993-94 following the currency crisis, in addition to the revolution in economic management that was begun by Fianna Fáil ten years ago.
It is our job as an Opposition to point out forcefully the dangers in the present situation, shake Government complacency and, even in these successful times for the economy, point out why we are still falling well short of our potential. We are entitled to be concerned about the poor overall strategy and the lack of financial prudence in regard to public expenditure, which has risen by 20 per cent when inflation has only risen by 6 per cent, shown not just today or yesterday but over the entire lifetime of this Government. The Government has given proof that, if re-elected, it intends to continue on the same spending course it has followed for the past two years. It is apparent that the Minister received little co-operation from his colleagues and was driven to the point of resignation, not, I suspect, by one rebuff but by an accumulation of them. If he has tried, more than we realise, to impose a budgetary discipline that is in the true interests of the country, he has failed.
This budget, unlike so much that this Government has done, is certainly transparent. It is in intent a full-blown election budget, but it has failed in its purpose. It is the rainbow coalition's 1997 manifesto in which it tries to appropriate the credit for all the good things it inherited. While the voter is being liberally showered with confetti, much of it has little real or lasting substance. The Government parties make no secret of the fact that they held back over the past two years, particularly last year, from giving much relief to the taxpayer, so that they could make the maximum impact in election year. The electoral cycle has taken precedence over the economic cycle in the most pronounced and obvious manner. I do not recall such blatant political cynicism during 20 years of service in this House, and the Government clearly hopes to get away with it. We intend that it will not do so. The Government long ago decided to do it this way, not for the good of taxpayers or for the good of the economy, but principally for its own electoral good. Moreover, while the ratification of Programme 2000 remains in the balance, the Government has decided to frontload the entire promised cumulative personal tax relief over three years into the budget to sway the doubters in the trade union movement. Our view is that the dividend from the strong but disciplined growth of the past ten years should have been spread more evenly over last year's budget also, rather than being bunched into one year when it will have disruptive economic consequences in the period immediately ahead.
The underlying reality is a lot less stirring than the presentation. Even after the budget the Government will collect almost £1,100 or 28 per cent extra per person in income tax than in 1994. Even after yesterday's much hyped concessions income tax receipts will still rise by £364 million or 8 per cent compared with last year. That is more than three times the rate of inflation. The Government will still collect £1 million extra income tax every day. People may talk about giveaways, concessions and great largesse but the public will not be slow to realise that every day, Saturday and Sunday included, they will pay £1 million extra in 1997. If that makes people jump up and celebrate, I will be surprised.
Tax revenue as a whole will rise this year by £743 million, nearly 6 per cent, while the Government will return £223 million in income tax and PRSI, though it will only cost the Minister £180 million net after buoyancy. Those are the figures in the small print, prepared as always by my old friends in the Department of Finance. The £180 million, which is all the taxpayer will get back, is less than half the excess revenue collected in 1996 and about one-third of more than £600 million in excess revenue collected in the past two years.
That it has been possible to have an almost uninterrupted succession of budgets since 1988 containing varying degrees of positive news is down to the sound management of the economy in the past ten years since Fianna Fáil took office in March 1987 and our consistent avoidance of a short-term approach. We did not take risks with the economy and this budget is the first departure from that since we adopted a new approach with the social partners ten years ago. While there has been a positive cumulative impact, the pace of tax relief over the past two years was painfully slow, given unprecedented economic growth. More prudent expenditure proposals would have allowed the same or far greater concessions to have been made this year and in other years, while at the same time reducing borrowing and the consequent £2.5 billion in debt service charges, which would in turn bring us into the virtuous circle of reducing the need to borrow.
There has been much loose talk in the media about Government generosity or largesse. It is important to understand this so-called generosity consists of allowing taxpayers a limited rebate on what they would otherwise pay the Government. Income tax will still yield the Government £1 million per day more than last year. The real generosity and largesse with taxpayers' money continues to be on the spending side, which is to increase £800 million on last year. In just one year the Government will manage to spend and to find ways of spending £800 million more. It is amusing — it would almost make me laugh, if it were not so serious — that the programme launched last week announced a 2 per cent increase in real terms during 1997 in supply services and that any excess in the target this year would be minimised. In gross terms the increase is 7 per cent, in net terms it is 4.4 per cent. Not alone is the ink not dry on the programme, there is no ink on it yet, because no one has signed it. It was only published a week ago, but the increase announced in the budget is almost 2.4 per cent more than the rate mentioned in it. If we are to have jokes, they should be called jokes. The Government should not con the Irish people by asking them to vote for a programme which contains blatant lies — seven days after its publication, we find there is no attempt to meet its terms. Even during the last week, while the Minister's spin doctors leaked the budget to The Irish Times and the Irish Independent, another 1 per cent was lost. How much will we lose in a year, given that we lost that much in a week and 2.4 per cent since the programme was negotiated in December? This is appalling and extremely serious. Perhaps no one cares any more that we will spend all the money the country can raise but people should know the facts. An extra £800 million is being spent in good times, when there are fewer people unemployed, fewer people drawing from the Social Insurance Fund, when we are meant to be in boom times with no pressure and everyone should feel happy. This small country is finding a way to spend an extra 7 per cent in gross terms and take an extra £1 million per day in tax. It is a sad reflection on what is beginning to happen after ten successful years.
It looks as though new spending will be announced every day. This week alone Ministers announced funds for the repair of primary and secondary schools, £12.5 million for the Dublin to Sligo railway and £18 million to fund rural water schemes — my colleagues who know about these things say the latter will be fraught with difficulty all over the country. The largesse will be endless and the announcements will soon become a joke. Most of the projects may in themselves be worthy and merit support but the way the Government intends to organise PR classes every few hours to make the next news headlines is fairly sick. Many of the promises will commit expenditure well beyond the lifetime of this Government. It took us three to four years in the late 1980s to pay off the vast bills from the house improvement grants introduced by the last Fine Gael/Labour coalition with an eye on an electoral spin in the March 1987 election. More kudos should be given to the Ministers and civil servants who manage to save public money rather than spend it.
The Government knew what the right policy was when it was set out in A Government of Renewal. Day to day net current expenditure will rise by 6.6 per cent in 1997 or 7 per cent in gross terms, which is above the ceiling of 6.1 per cent announced last month. It should only rise by 4 per cent. This is the third year the Government has willingly ignored its targets. In the past two years it has overrun its higher targets by the end of the year. In 1998 and 1999 it projects expenditure growth to be closer to 4 per cent but it goes on to provide a large contingency fund, which is an invitation to laxity and shows it has no serious intention of adopting the discipline it recognises as desirable. If one adds the contingency fund, current spending would continue to grow by as much as 6.2 per cent in 1998 and 6.6 per cent in 1999. Those projections are a year and two years in advance, and since another projection has increased by 1 per cent in a week, who knows what projections will be when the time comes? Despite a few vague, pious commitments in Partnership 2000 to keeping increases as close as possible to 2 per cent in real terms and reducing the rate of increase in current public spending, this Government had no intention of doing such a thing. It is effectively already in breach of its programme.
The public will view with a cold eye the Government's attempts to buy votes with their money. Those voters will recognise also that the current high growth and the scope for tax relief in this budget is a result of a sustained economic performance since 1987, the first eight years of which were under Fianna Fáil-led Governments, and owes precious little to any tinkering initiatives undertaken by this caretaker Government. This Administration inherited high growth and can reasonably claim credit for having kept it going thus far but in times like this it should budget for surpluses and provide against the inevitable rainy day. My fear and that of many economic commentators is that, unless we now speedily adopt a more disciplined approach, we are in grave danger of hitting the buffers before too much longer.
One of the key issues in the coming general election will be which party or parties will be best able to sustain current economic progress and address the real needs of people in the next century. Any policies we put forward will have to be consistent with much tighter budgetary parameters. We deplore the present Government's tendency to squander one of the best opportunities we are ever likely to have to put our economic and social progress on the soundest and most sustainable footing.
The Government offers the public the spectacle of its apparent political death bed conversion to the necessity of lowering the personal tax burden in the hope of gaining from the electorate a renewed lease of life. In this optimistic scenario, the Government, once back in office, would revert to habit and increase its various spending programmes for the next four years without having to do more than make an odd token gesture in the direction of further tax relief.
If people accepted this budget on face value as proof of a newly found commitment to tax reform on the part of the coalition partners and re-elected them on that basis, they would be likely to be sorely disappointed. They would analyse this budget more closely and find it is by no means the giveaway which might be imagined.
Last night I listened to the spin put on the budget. After three years of excellent growth rates, with real growth in GDP at 10 per cent in 1995, at 7.2 per cent in 1996 and at an estimated 6.5 per cent in 1997, the Government has managed to cut the standard rate of tax by only 1 per cent. Some people tried to castigate the former Fianna Fáil and Progressive Democrats policies when in coalition but in 1992, when times were more difficult and economic growth was lower, with an excellent social welfare package, that Government was able to cut the top rate of tax by 4 per cent, the standard rate by 2 per cent and to increase the bands by 11.5 per cent — an increase not matched since. Such changes can be made if the money has not been spent before the budget is drawn up.
The budgets of 1995 and 1996 and the projections for 1998 and 1999 are a far better guide to the political intentions of any future rainbow coalition Government than this year's misleading so-called "election budget". Therefore, in effect, we can examine five budgets to understand the Government's intentions. An election budget by its nature is an exceptional event, unlikely to happen more than once every five years. All the indications are that for the Labour Party and Democratic Left this budget is a heroic once-off exercise, never to be repeated. The Government would not be able to afford to repeat it because of its ideological commitment to higher public spending and the PAYE workers would once more be forgotten or fobbed off for a few more years.
This budget, offering headline tax concessions of £393 million in a full year, means that, technically speaking, if the same methods of calculation are used as in the past, the cumulative tax obligations under Partnership 2000 may already have been more than fulfilled. The Government is under no obligation to provide any further tax reductions over the next two years. Deputy McCreevy pointed out yesterday that this is so because they have listened to grass roots opinion among the social partners and realised that if it was not paid for up-front the programme would not be agreed. It is better that is achieved than face a return to the free-for-all of the past.
Any lightening of the tax burden and proper social welfare increases are welcome to recipients at any time. However, it is important to put them in context. Many budgets over the past ten years have also contained substantial and, indeed, greater reductions in tax rates. In the Fianna Fáil budget of 1989, introduced by Deputy Reynolds, the standard rate of income tax was reduced by 3 per cent — from 35 per cent to 32 per cent — the top rate of tax by 2 per cent and the standard rate band was increased by 7 per cent. In the 1990 budget of the Fianna Fáil and Progressive Democrats coalition, the same Minister reduced the standard rate of tax by 2 per cent, reduced the top rate by 3 per cent and increased the standard rate band by 6.5 per cent. The standard rate of VAT was also reduced by 2 per cent. In that budget there were several welfare measures, costing a total of £114 million, with a full year cost of £235 million. Subtracting the increase in health expenditure and adjusting for the cost of living increase given, there was a bigger social welfare package in 1990 than in 1996, despite the spin attempted yesterday.
In the 1991 budget, the standard rate and the top rate were each reduced by 1 per cent and there was indexation of bands and allowances. The first budget I introduced, in 1992, reduced the standard rate by 2 per cent, the top rate by 4 per cent and gave a large 11.5 per cent widening of the standard rate band, costing £168 million in that year and well over £200 million in a full year. The Minister's package may, with the passage of time, cost more than those of his predecessors, for obvious reasons, but he has not been able to achieve as much. The attempt to cast this budget as the greatest giveaway of all time is revealed as a major untruth if one examines the budgets of the early 1990s.
With many more people at work, especially since the latest boom began in 1993, the cost of each tax concession has become more expensive. The 1993 budget was difficult because it came in the aftermath of the currency crisis. However, in 1994 I announced an income tax package costing £198 million in that year and £333 million in a full year. Personal allowances were increased by 8 per cent, the standard tax band was increased by nearly 7 per cent and the 1 per cent temporary levy was removed. In 1997 personal allowances will increase by 9.4 per cent, which is slightly more by comparison, but the standard rate band has been widened by only 5.3 per cent, which is less.
The Minister's budget is only of special note when compared with his own previous feeble efforts. It contains the first small reduction in the standard tax rate since the Labour Party came to office five years ago. At that time, the previous Fianna Fáil and Progressive Democrats coalition had pledged to reduce the standard tax rate to 25 per cent and the top rate to 44 per cent. With higher revenues and reasonable controls on expenditure we would be at those levels today. When I aimed at a 44 per cent rate in 1992 it was in the context of an economic growth rate of 4 per cent yet the rate has been as high as 8 to 10 per cent since then. Even taking into account the 1 per cent employee PRSI reduction, this budget is a poor enough reward for the public after five years' strong growth.
If the Government parties were not facing an election it is unlikely that there would have been any reduction in the standard rate, although it is one of the highest in Europe. There is no reduction in the top rate of tax. If the Government will not provide such a reduction in an election year, when revenue is strong and growth is high, it certainly will not provide it in any other year. Those who will vote for the parties in Government should be clear that they will vote for a 48 per cent higher rate of tax over the next five years which, with PRSI and levies, brings the total marginal tax take for low to middle income earners — cutting in at £13,600 per annum — to around 55 per cent. My colleagues in Opposition, unlike the Government parties, would not be of the view that those earning £13,600 a year, which is below the average industrial wage, are rich. Fine Gael wanted to lower the top rate of tax, as we know from statements made by its backbenchers, but they are politically impotent in budgetary matters. Tax policy is driven by the Labour Party and Democratic Left, apart from the odd small item in the margins to keep Fine Gael happy.
Everyone agrees that the main priority is to widen the standard rate band so that people do not reach the higher rate of tax so quickly. However, as that will take some time, there is also a case for lowering the top rate. No one should be deprived of more than 50 per cent of their marginal earnings when income tax and employee's PRSI are combined. In some countries the top rate of tax only applies to the really well off and the rich but in Ireland it applies to people who are not well off. The really wealthy can and do avail of the many investment schemes provided by the Minister and his predecessors to reduce their tax burden, such as special savings accounts and special personal investments. The 48 per cent rate hits the much less well off with full force — the factory worker or the other working spouse who have neither the disposable income nor the expertise to engage in imaginative schemes. We do not want a situation to develop whereby, in the words of a famous New York society hostess, "It is only the little people who pay tax". After this budget, single, low to middle income earners on PAYE will still pay a marginal rate of 55 per cent on income above £13,600 and up to the new PRSI ceiling of £23,200. Many middle income earners with families get a poor deal from this budget. In many cases, low to middle income married couples are only 1 to 2 per cent better off while many of the higher earners are 3 to 4 per cent better off.
It was suggested yesterday that everyone would get an extra £10. However, only 5 per cent of income earners will get this amount and it is arguable whether they need it. Would it not have been better to take more people out of the tax net, support the enterprise culture and deal with the poverty trap? However, the people who need most will get only 1 to 2 per cent and, we should remember, they will get tax relief at the standard rate on their VHI or BUPA contributions and their mortgage interest payments. We will wait to see what they get in real terms at the beginning of the tax year in April but, having examined the figures, they will be gravely disappointed.
The Labour Party and Democratic Left like to present themselves as the friend of the PAYE worker but they are not. Many married couples with children will only benefit to the tune of £4 to £6 a week and in many cases single people will benefit less. The Government parties collude and will go on colluding in maintaining one of the most onerous personal tax regimes in western Europe. Those with a vested interest in high public spending have no wish to see real change. At every income level, except the lowest, workers will continue to pay far more income tax here than in Britain or most other European countries. Just as one swallow does not make a summer, one budget does not make a tax reforming Government.
We are in grave danger of falling behind other countries again. The British Labour Party is promising an introductory tax rate of 10 per cent. Germany wants to slash the top tax rate reached at far higher thresholds than in Ireland, although a rise in VAT to pay for it is being resisted. The Minister should not talk in a misleading way about our GDP per capita being about to overtake that in the North or Britain. It is good to know that our productivity per head matches or exceeds that of our neighbours but our personal living standards after tax, or our gross national disposable income per capita, are still at least 15 per cent below that of the UK. That is almost entirely due to our tax system or, more precisely, to the fact that we need to raise so much more tax to fund basic improvements in services.
The Minister should encourage realism about our economic situation and the distance we still have to travel before we catch up. We will need a budget like this for several years to come if we are to make real progress and we will not get that from the Rainbow Coalition. There is no evidence of political will among the present Government parties to achieve that; they have already signed off.
An article in Finance magazine, in December 1996 about economic and monetary union and the removal of the exchange rate as an instrument of economic management stated:
It is an inevitable fact of economic life that if the Irish Governments do not manage to reverse Ireland's basic uncompetitiveness with regard to the UK in taxation, its economic progress vis-á-vis Britain will be progressively dragged down in the new euro environment ... If we do not address the tax inequality that exists between the two economies, it is a fair bet that by 1999, the Irish-UK GDP convergence scenario will be changed, and the gaps begin to widen again to Britain's advantage.
There is little or no sign of much long-term tax strategy in this year's budget. In the past two years, this Government collected far more in tax than they had budgeted for. In 1995, they collected an extra £259 million in income tax; in 1996, another £174 million giving a total of £433 million. In terms of tax revenue, there was a surplus of £139 million in 1995 and £452 million in 1996. The VAT owed by corporations which would have made revenue higher still was also transferred to 1997. Over £600 million more than was budgeted for was available to be collected in tax over the last two years. Less than half of that is being given back this year and the other half, of course, has been spent.
In 1995 and 1996, the Government published Estimates of revenue which bore no relationship to anticipated economic growth plus inflation. In 1995, despite expected high growth, pre-and post-budget revenue was projected to grow by only 5.6 per cent. In 1996 this was marginally higher at 6.5 per cent. In both years, as in 1994, the economy was growing by between 5 and 7 per cent and the outcome was far higher. This year, in contrast, pre-budget tax revenue is set to rise by 7.7 per cent which bears a much more realistic relationship to the likely level of economic growth plus inflation. My former colleagues in the Department of Finance would have liked to keep that lower and then see if they could beat it but they were forced by the Government to go to the top end of the figure because it was an election year and they probably had to deal with Ministers who know they would not be around anyway so they agreed to put in the figure.
However the important point which will not be missed by people in the markets is that it is less likely there will be a significant revenue surplus this year to cover unforeseen additional expenditure. What you see is more likely to be what you get, unlike what happened over the past two years. There are no hidden reserves or contingency funds for 1997 in the Department of Finance. The Government is using up its limits, and it would be unsafe to assume there will be a revenue surplus to cover unforeseen or additional pre-election expenditure. This means that overruns will probably push up the EBR. Any further expenditure commitments not covered in this budget will shake confidence and should not be made. We will be asking Ministers to make it clear during further announcements whether they have been fully budgeted for this year.
It would have been difficult to determine the exact fiscal stance of the last two budgets because both the revenue and expenditure outturn bore little relationship to the targets or in the case of revenue growth to the state of the economy. What looked at budget time in 1995 and 1996 like a mildly reflationary budget, adding 0.1 per cent or 0.2 per cent to the EBR, was not in the outturn. At times of high growth, a somewhat deflationary fiscal stance, even de facto, is a useful way of dampening down a runaway boom but it would have helped confidence if the Minister had been more ambitious in his borrowing targets and had opted for a more balanced mix as between expenditure increases and tax relief.
A great opportunity is being missed to eliminate borrowing by 1999, which has been recommended by the ESRI and every commentator of note, in line with the stability pact which this Government claims credit for negotiating for their European partners but it does not seem obliged to take heed of it? The Minister's budget strategy is not in keeping with the stability pact agreed in Dublin in December and if we run into difficulties when other European countries are prospering, we will get little sympathy because we asked them to agree to it.
There are three good reasons for a balanced budget. The first is to create room for manoeuvre in any recession. The headroom is very tight particularly, as cyclically adjusted, our borrowing level is now about 1 per cent above the Maastricht limits. That is known by the Central Bank and the Department of Finance but it is dangerous in our current position of excellent times of high revenues, creation of jobs, high economic growth, huge transfers of money. What will it be when the transfers from Brussels are lower, when economic growth is declining and when there is pressure from interest rates and inflation on the budget? That will happen within the economic cycles of this country. Anybody who cares about the future of the Irish economy as Fianna Fáil does, having been the architects for putting it right, care about that case. The second reason is to have the scope to increase capital spending when EU Structural and Cohesion Funds are curtailed after the year 2000. The third, and most important, reason is to create the basis for sustained tax reductions to make our tax system much more competitive.
In 1994, I introduced the first current budget surplus in nearly 30 years. After an unnecessary relapse in 1995, I am glad that is being firmly consolidated. That at least represents some progress. If the economy is being managed properly, we should see increasingly large current budget surpluses in future years. That is no longer enough as less progress is being made on the EBR. In 1995, at budget time, the EBR target was raised from the previous year's outturn of £672 million to £813 million which I still cannot understand. The 1995 outturn was lower, £627 million, but again in the 1996 budget the target was raised to £729 million. Last year, the outturn was down much more sharply to £437 million or 1.2 per cent of GNP largely because of the absence of tax concessions in last year's budget as well as continued high economic growth. If there were serious political will, we would already be on the brink of eliminating the Exchequer borrowing requirement, thus freezing the amount paid on debt interest, in many cases to foreign banks. Instead, this year the cost of debt servicing is set to rise by £200 million to £2.56 billion, equivalent to roughly 50 per cent of income tax revenue. That is another case where the Government is trying to let on that things are being improved but they are not.
The opening deficit this year was £334 million or 0.8 per cent of GNP. I would have been satisfied for this year with an EBR of £500 million or 1.3 per cent. Instead, the Minister has pushed it up to £637 million or 1.6 per cent of GNP, a disappointingly high figure. I am appalled at his projections of £856 million for next year and £698 million for 1999. That means that this Minister and this Government, if re-elected, are proposing to borrow a further £2.2 billion. This is totally irresponsible and unacceptable. I would ask people to look closely at that figure of £2.2 billion in the next two years which is what the Government is putting to the electorate.
I have argued for a long time that the pot of gold to fund both tax reductions and improved services is to be found in the reduction of debt servicing. However, we can only start to access it if we stop adding to our national debt of £30 billion. The Minister has boasted about the first reduction in the national debt last year thanks to exchange rate movements bringing it slightly below £30 billion, having increased it by £1 billion in 1995. Of course, that was just one of those tricks in the system which will not continue. The Government should look at the proposals we have made concerning the national debt.
Before Christmas the Central Bank issued a strong warning against an expansionary budget. It stated:
It is especially important that fiscal policy should not be expansionary. The present buoyant disposition of the currency does not warrant an expansionary fiscal stance which could only serve to increase inflation dangers which may be already present.
The Central Bank repeated that warning no less than three times in its bulletin. The final one reads:
In the current context of strong economic growth, however, any tax reductions would have to be made only in conjunction with more stringent control of expenditure.
This is not being done. Unfortunately, we now have a position where the Central Bank is out of line with the Government.
The EBR announced by the Minister makes this by any standards an expansionary budget. It cannot be read any other way. The budget is injecting money into the economy which is already fast-growing on all fronts. Even larger tax reductions would be fine if they were not combined with day to day spending increases up 6.5 per cent.
Despite political pressures from colleagues, the British Chancellor of the Exchequer, Mr. Kenneth Clarke, was determined not to knock the British economy off course just in order to win an election. Unfortunately, I detect no similar prudence or sense of public responsibility here. The Minister is taking a gamble that inflation will not take off and that the Central Bank will not have to put up interest rates, in a way that would claw back from anyone with a mortgage or substantial bank borrowings most of the benefits from tax reductions.
Our European Monetary Union membership will be at stake. The Minister may not be as happy with the situation as he claims in public. He has not been getting the support which all recent Fianna Fáil Ministers for Finance got from their leaders since 1987. In fact, the Minister almost resigned because his party leader, the Tánaiste, went over his head and settled a deal with the public service unions which the Minister had said publicly he could not afford. As I understand it, he was not even consulted about these matters until they had been concluded.
Under Opposition pressure this Government chose a period of steeply rising house prices to abolish the residential property tax and replace it with a once-off up front additional charge on more expensive houses, both to pay for it but also to dampen the effect on demand. Many people were poised to come into the residential property tax net. Fianna Fáil pressure has saved them from that fate. The Government raised the stamp duty on houses over £150,000 from 6 per cent to a penal 9 per cent. With house prices rising annually by 15 per cent for the last number of years, it will only take three or four years for a house at present worth £100,000 to go over the threshold.
It means a family buying a house costing £175,000 will have to find over £15,000 on top of the price of the house. A house of that value in Dublin would not be grandiose. The Minister for Social Welfare, Deputy De Rossa, has plenty of them in his own constituency.
Residential property tax has gone, not out of conviction but for reasons of electoral expediency. I am sure those who were affected will not forget that it was political pressure from the Labour Party allied to the taxing zeal of a former Fine Gael leader which brought in RPT, nor that it was the Labour Party who insisted that it should remain for 14 years, hitting more and more house owners, mainly in the Dublin area.
Until recently, Labour had ambitions to extend it and turn it into a general property tax. Having acquired upwardly mobile floating voters in the last election, Labour has at last agreed to its abolition. I am glad of that because the next Government will be spared sanctimonious cant on its abolition from the Opposition benches. However, they have substituted another tax mainly on the homes of people who they claim are rich but in many parts they are certainly not so.
In general, the old, lower income groups and the unemployed were given a high level of pre-budget expectation. Their hopes have not been fulfilled. What they have got shows they have not received any special consideration other than the welcome increase in the back to work allowance scheme introduced by Fianna Fáil in 1994. Otherwise, there is little incentive here for the unemployed to join the workforce. Almost no fall in the numbers unemployed is projected to 1999.
The tax threshold for a single person has been increased by £100 and a married couple by £200. Is this a serious attempt to encourage and reward work? The tax gain for the single person or childless married couple on low incomes is absolutely minimal at £1 or £2 a week.
My main complaint against this budget is its once-off short-term nature. Even on its own it is nothing remarkable. Taking the coalition's record as a whole, it has been a story of disappointment and a golden opportunity for fiscal advance and consolidation missed. There could have been scope to take most of the low paid out of the tax net altogether. It was not done but it is not too late, I hope, for the next Government to take the situation firmly in hand.
If we want and need real tax reductions, incentives for employment, and resources both for investment and to fund a caring social policy, we have to introduce a policy of greater expenditure restraint and of eliminating borrowing. We need to do many things to make our economy more competitive. We need to reduce the income tax burden, corporation tax and employers' PRSI, which was virtually ignored this year. We also need to create the room down the line to replace capital investment funds that may no longer be flowing at the same degree from Brussels.
Fianna Fáil will be spelling out its strategy in more detail over the coming weeks. Our aim is for a high growth, low tax economy based on social consensus that can afford to be caring. However, if growth prospects are to be sustained so that the continuing fruits are to be shared out equally, we need a change of Government. We need that Government to change fairly smartly.
