It is only twice yearly that we have the opportunity of having something in the nature of a general review of the financial situation with the Minister for Finance present, and these opportunities are too valuable to be allowed to pass without making full use of them. Therefore, I propose to say something about the general financial background of this Bill rather than deal with the particular issues which Senator Hawkins has been dealing with. The Minister, in introducing the Bill in the Dáil, called attention to the background against which his financial proposals are framed. I think it is becoming more and more clear as time goes on that the Estimates and the Budget every year form a consistent whole, and that now, in March, we are at the beginning of that grand inquest into the affairs of the nation which takes place every year and which culminates in May in the Budget. We are now, if you like, at the stage of trying to diagnose the evils and ills in the national situation, and I think that the cure, or the attempted cure, if it is to be found, must be very largely found in the Budget, for reasons to which I will come later.
The Minister will agree with me that there are three things to look for in diagnosing the condition of the national economy which he is trying to deal with in his Budget. One which is most talked of is the balance between revenue and expenditure. It is important, but it is an internal affair which is very largely inside the control of the nation. Another balance which is of importance but, I think, of secondary importance also, is the relation between the price level at home and the price level abroad. The most important balance, I think, against which the Budget and the Estimates must be framed and the whole financial policy of the country must be constructed is the balance of external payments and in the balance of external payments there are signs at the present moment calculated to cause a certain amount of disquietude in people who are interested in the health and welfare of the national situation. Disequilibrium in the balance of payments of the magnitude and nature to which the Minister referred in the Dáil must sooner or later be corrected. If we do not correct it in one way, nature will correct it in another way.
No community of people, any more than a family, can go on living beyond its income indefinitely. Disequilibrium in the balance of payments of the amount which emerged in the current financial year, as far as the latest figures show, does seem to indicate that either the nation as a whole, or the Government, or possibly both, are living slightly beyond their income. It therefore behoves the Minister for Finance, as the guardian of the nation's purse, to try to correct this unhealthy tendency. I do not suggest for a moment that these unhealthy tendencies are entirely or even to any great extent the fault, or even the responsibility, of the Government itself. As everybody knows, the terms of trade moved against this country. The Minister in the Dáil stated that this factor alone accounts for £8,000,000 of the disequilibrium in the current year. That in turn reflects the delayed consequences of devaluation, together with the various events in the international field, stockpiling, rearmament and the war situation in the world.
Possibly the full adverse effects of the changes in terms of trade have not yet fully appeared. I am afraid that the rise in wholesale prices, which is shown in the terms of trade, has not yet seeped through into the cost of living and the retail index number to the extent that it will. I am very much afraid that what at the moment appears to be merely an adverse turn in the balance of payments may, before very many months elapse, become reflected in a rise in the cost of living, which is a much more urgent matter for the ordinary member of society.
I do not wish to discuss the question of the Prices Commission and the attempt at freezing prices. Obviously, prices cannot be frozen in a position of this kind. All that the Government can do, I think, is to make the gallant effort it has made to keep the inevitable rise within reasonable control and, above all, to introduce publicity into this situation so that, at least, whatever rises in prices do take place, will take place under the searchlight of public investigation and that people will not be suspicious that the rise in prices is the result of some improper manipulation or profiteering on the part of middle men and business people. If the Prices Commission can do nothing else to hold the line, it at least can do that.
While disequilibrium in the balance of payments is to a very large extent the result of deterioration in terms of trade, I do not think one can close one's eyes to the fact that there are other factors at work as well and that there is a £20,000,000 gap which, according to the Minister's own calculation, is not accounted for by the adverse terms of trade. I think the Minister will agree with me that this gap in the balance of payments will have to be closed somehow, sooner or later, I do not say this year, I do not even say next year. No country, any more than a family, can go on living forever beyond its income in the way in which this country has been doing over the last year.
If it were not for the fact that we are a creditor country still to the extent that we are, a course would be forced on us in the hard way. If we were a debtor country we would have to trim our sails to the facts of the situation, whether we liked it or whether we did not, unless we were able to borrow abroad, unless there were nations in the world prepared to extend Marshall Aid to this nation continuously in almost unlimited amounts. We are not faced with that urgent situation, owing to our creditor position, which in its turn is owing very largely to the thrift and foresight of Irish people in the past. Therefore, we have a certain amount of freedom which is denied to other countries and I suggest to the Minister that that position of freedom gives to him and the Government a certain responsibility. That freedom is to be used and not abused and the very fact that we have a freedom that other countries have not imposes on him and on the Government the responsibility for dealing with the situation in a deliberate, calculated and prudent manner. He can secure that, at least, the necessary steps, the necessary deflations, are not imposed, through force of circumstances, on an unwilling country. They will be the result of measures deliberately taken by the Government after full review of all the aspects of the situation and all the consequences of anything they decide to do.
As I said, I do not suggest for a moment that equilibrium can be restored in the current year, but I think the Minister will agree that a long period of dissipation of external assets is not a prudent course for any nation to pursue. Such a course would reduce this country from its present creditor status to a debtor status. Certain other countries in Europe, not very far away, have experienced that change of status in recent years, largely through no fault of their own. I do not think that either the financial or the political consequences of such a change are such as to commend themselves to anybody with regard to the national well-being.
I am perfectly aware of what is said about the deterioration of our sterling assets, of the criticism which is made of the wasting assets in which our foreign reserves are held. That is, no doubt, true, but it must be remembered, as against that, that although sterling is depreciating in value, it is not depreciating more rapidly, as far as I know, than any other currency in the world to-day. It is regarded at the present time as one of the hard currencies. It is not despised by people in other nations who are short of it. It may in the future become convertible to a very much greater degree than it has been in the past. Therefore, I certainly do not think that it is wise or prudent for people to despise the value of our external holdings simply because they are in a currency which in a world situation is losing value like every other currency.
But, apart from that, the central fact remains that they are the only reserves we have and that they are the only reserves that stand between us and the loss of our financial and, to some extent, I suggest, our political independence in the world to-day. Therefore, I think the Minister will agree with me that the total dissipation of these assets, or even rapid dissipation, is a course of action not to be condoned or regarded as even in the realm of the possible.
That being so, it does seem to me that there are three questions which need answering in this connection. The first question, I suggest, is to what extent are corrective forces to be observed in the present situation? To what extent will the disequilibrium tend to cure itself if nothing is done by the Government? The second problem, I suggest, is: to the extent to which corrective forces are not at work, what is the desirable extent to which the Government should attempt itself, by policy, to close the gap? Thirdly, having decided on that amount, how should the gap be closed; what measures should be taken to try to close that amount of the gap between our imports and exports?
As regards the first of these questions, I think there are certain corrective forces observable. The Minister, I think, referred to them in the debate in the Dáil. There is a possibility, I hope, of an increase in the volume of production and the volume of our exports. I do not wish to delay the Seanad by quoting from the Minister's speech in the Dáil, but the Minister did give certain figures, as reported in column 788 of the Dáil Debates, showing a substantial increase in agricultural and industrial production. There is no reason why there should not also be an increase in our exports and, if export prices rise, why the export side of the account should not improve in time. It is also possible, I think, that there may be a certain reduction in the volume of imports partly caused by outside scarcities, partly caused by inaccessibility to certain goods, and partly caused by the end of stockpiling, which, after it has been in existence for some time, tends to slow down. There also seems to be indications in the outside world that the upward rush of wholesale prices has come to an end and that the rate of increase in these prices is tending to slow down. It has been suggested in recent weeks that the change in American stockpiling policy may easily result in slowing down the increase in raw material prices, and that there may be something like a new equilibrium of raw material prices, at a higher level, it is true, than that which we had some years ago but, at the same time, that this constantly rising tendency may stop. This would be a self-corrective force in the balance of payments in regard to which I suppose the Minister has already made some estimate.
I do not think anybody would be optimistic enough to suggest that the forces I have mentioned would correct the disequilibrium and this gives rise to a second question. It is a question for the country and a question for the Minister: how far should he deliberately attempt to close the gap remaining when all the corrective forces may have done their work? I do not think it necessary, in one year or in even two years completely to close the gap. That is to say, I do not think that an adverse balance of payments is so evil of itself as to call for a rapid change in policy. What I really have in mind is the problem which was discussed in this House last year in connection with the repatriation of Irish capital invested abroad. It is very difficult, of course, to say, looking at the list of imports, how far they are of a capital nature and how far they are not. At a time like this, imports that appear to be consumption goods may really represent something in the nature of an accumulation of stocks. Therefore, I think to the extent these imports are of a capital nature or represent an accumulation of stocks, that they are not necessarily in themselves evil things. We discussed the matter fully last year in this House and I think there was general agreement that at a time of rising prices, at a time of a tendency to increase investment in home production, at a time when Government policy quite definitely is to increase production, this disequilibrium in the balance of payments by the repatriation of sterling is not in itself a bad thing. Therefore I suggest to the Minister that we should try to make some sort of rough estimate of the remaining gap that is to be closed in capital imports, of how far they are consumption goods for current consumption or how far they are being imported for the building up of stocks or stockpiling. There is the question of how far the imports are made up of goods for current consumption and, above all, of the extent to which they are luxury goods, and there does seem to be a case there for trying to check them. The precise measures which are best calculated to bring about that I shall suggest later.
I do not wish to wander too far from the issues in the Central Fund Bill. I want to avoid giving the impression of treating this matter academically but I cannot help saying that whatever measures the Minister takes must be of a deflationary character and that, in the short run during which an expansion of production and an expansion of exports cannot be expected to take place—because an expansion of production and an expansion of exports take time—the correction of the disequilibrium in the balance of payments usually involves something in the nature of a reduction in some branch of internal expenditure, in other words, a deflation. There are ways in which this can be done which are not feasible in this country. There are more or less painless ways of imposing deflation, such as the devaluation of the Irish £ which we have discussed fully and which has been objected to on various grounds. If the devaluation of the £ is not regarded as a practical measure, then I think the Minister may be forced to impose a certain deflation by interfering with the standard of living. I should like to mention to the Minister one more or less painless method of imposing deflation which I do think is open to the Government in the circumstances of this country. Countries differently circumstanced from us, whose banking systems are not so integrated with the banking system of other countries and whose central banking mechanism is different from us, may possibly succeed in imposing a deflation of credit also through a rise in the central bank rate. That matter has been fully discussed in the Report of the Banking Commission—how far a rise in the Central Bank rate would restore equilibrium in the balance of payments.
That was one of the problems discussed in the report of the Commission issued in 1938. The conclusion is that owing to the peculiar nature of the Irish banking structure, a banking policy of this kind would not, in fact, be effective, and that, therefore, one of the accepted methods of correcting the disequilibrium in the balance of payments is not available to this country in present circumstances. I might suggest to the Minister that although the ordinary bank rate policy is not calculated to be effective, a certain restriction of credit on the part of the commercial banks, voluntarily undertaken, might have the slightly corrective result of producing some discouragement to over-borrowing for socially undesirable purposes at present. I have mentioned two accepted methods of imposing deflation, one, the devaluation of currency and the other revising the bank rate. I do not think that either is practicable or would in fact be effective. Therefore I return to what I said at the beginning of my remarks, that I think it is becoming more and more realised in the world to-day everywhere, that the balance of payments must very largely be kept at equilibrium by means of budgetary policy.
The Budget has long ceased to be the mere housekeeping account of the Administration. In the old days, the Budget simply was an effort to raise, at the minimum of cost, a certain amount of taxation to pay for essential services. These days have passed away. At the present time the Budget, as I have said already—this debate to-day and the debate last week in the Dáil are the first stages in the debate leading up to the Budget— is the appropriate mechanism for restoring the equilibrium in the balance of payments. In this country it cannot be left to the Central Bank to do that by bank rate. The Central Bank, which might be made use of for that purpose in other countries, has not got the power to do it here. The Minister for Finance and the Government in this country must, if they wish to restore equilibrium in the balance of payments, take the steps themselves, and the place in which to take the steps, I suggest, is through the Budget which will be opened by the Minister for Finance at a not very far distant date.
As I say, I am very anxious to avoid wasting the time of the House and of appearing academic in my approach to these matters which are all so topical and so pressing. I do think there are four directions in which the Minister for Finance might impose this deflation. It could be done by suitable budgetary policy. It is generally agreed to-day by every student of the subject that the expenditure of the community can be segregated into four classes, and that, when these four classes have been accurately measured, nothing really should escape the statistical net. Community expenditure can be classified into (1) private expenditure on consumption goods, (2) private investment, (3) Government expenditure on current consumption, and (4) public investment. These are the four directions in which money can be spent if it becomes necessary to impose deflation on the community. Deflation means cutting down purchasing power, cutting down expenditure in some direction pending the growth of productivity and of exports with, as we all hope, a rise in export prices. That is what we all hope will, in the long run, be a solution for this problem.
The cutting down of one of these four magnitudes is the essential policy required to restore equilibrium in the balance of payments. As I say, every one of these four magnitudes could be reduced through appropriate budgetary policy. May I say a word about each one of them? As regards private consumption by private people, the Minister stated in the Dáil, and the published figures bear out what he said, that there is considerable expenditure in this country, a rising expenditure, on articles which must, by any standard of classification, be regarded as luxury or semi-luxury goods, many of which are imports. An increase in indirect taxation on these luxury goods would seem to achieve killing three birds with the one stone. It would reduce consumption and, therefore, reduce imports, and would help the balance of payments on the import side. It would raise revenue and, therefore, would be welcome from the budgetary point of view. Finally, it would not raise the cost of living because the objects I have in mind, rightly or wrongly, are excluded from the cost of living index number. Therefore, to raise their price would not have the effect of raising the cost of living index number, and, that being so, could not have the effect of giving rise to claims for additional wages. Hence, there could be no attempt to produce wage inflation. I suggest to the Minister that it is a deflationary measure of a kind to which he should give his utmost attention.
Another measure of the same kind was dealt with by the Minister for Agriculture in the debate in the Dáil, and that is current voluntary savings. The essence of deflation is to make people save more than they had been saving before. There are two ways in which you can make people save. You can prevent them from consuming by high taxation of the kind I have just described, or you can encourage them to contribute to the various savings certificates, and loans issued by the Government. I suggest to the Minister that an increase in the amount of voluntary savings in this country would help him in the disequilibrium position; but, before an effort of that kind can be expected to meet with success, the people of the country must be attracted by what they regard as satisfactory rates of interest, and they must have some assurance that, in all probability, the value of money in the country is not likely to deteriorate too rapidly in the near future. Unless the public are satisfied about these two conditions, I do not think the savings campaign would be a great success.
The line of attack which the Minister could make on private investment could, as I have already said, be effected to some extent by a credit restriction policy undertaken by the banks. That does not seem to me to be particularly desirable, in view of the amount shown to be privately invested by the national income figures. I think that the amount of private investment here was rather too little rather than too much. Certainly, in so far as investment is taking place, directly or indirectly, in the export industries, in agriculture, and in the tourist industry, anything in the nature of a discouragement of private investment would, in the long run, be doing more harm than good to the balance of payments position. There may be a certain amount of private investment of a luxury, purely internal domestic character. It may be that a selective policy by the banks in the granting of loans would reduce undesirable investment of that kind. At least, it is an avenue which should be explored in this quest for deflation which is necessary at this stage.
So much for private spending and private investment. What about Government spending and Government investment? All I want to say about that is this, that I do not think one can ask the Government to reduce its current expenditure without asking it to reverse engines almost entirely so far as very important parts of Government policy are concerned. I do think that the critics of Government action in relation to the balance of payments and to the Budget, if they object to the balance of payments position and if they object to the amount of public money that is being spent, should indicate categorically what parts of current public expenditure, in their opinion, could be equitably and conveniently reduced. I am not aware that any concrete suggestions of that kind have been made to the Minister in the course of the debate in the Dáil or in this House. I think the same is true of public investment. But before I leave the subject of public expenditure perhaps I should say, and I am sure the Minister will agree with me, that although I think it is too much to ask any Government to cut out essential articles of general policy, at the same time I think this is not a time to engage on new schemes involving public expenditure unless they are absolutely necessary. I think that the social desirability of any scheme designed to help the health or the welfare or the social well-being of the nation should be postponed in times like these until the country can afford additional expenditure on current services more easily than it appears to be able to afford it to-day. Certain attractive propositions, so to speak, have been offered by Ministers to the public—not, I must say, by the Minister present in this House to-day—and some of these attractive propositions have not been accompanied by any estimate of their probable cost. I do not think that objects of expenditure should become objects of Government official policy until their cost has been reckoned.
The final field in which some deflation is possible is that of public investment. I think one can say, as I said regarding private investment, that the amount of public investment seems to be slowing up or trailing off—that, although there are increases in the capital programme in some directions, they are more than outweighed or decreased in other directions. Therefore, it looks rather as if capital investment, instead of going up is tending to go down naturally and may even be one of those forces which I described earlier as "self-corrective forces" in the situation. We discussed this question last year on the repatriation debate. The public investment which the Government is undertaking—the land rehabilitation scheme, the improvement of agriculture, and so on—will, in the long run, have some effect on production and exports. Taking the long view of the balance of payments, it might be a foolish thing rather than a wise thing to reduce it at the present time. I think I have covered the only fields in which the Minister can reduce expenditure. In my opinion, for what it is worth, something in the nature of increased indirect taxation on luxury goods seems to be calculated to produce that effect with the least harm to the community. When I talk about the least harm to the community the factors I have in mind are the effect on employment, the effect on production and the effect on the cost of living. I think that increased direct taxation at a time like this would possibly have an adverse effect on employment and possibly on production. I do not think it would necessarily have an adverse effect on the cost of living. I think, on the whole, that, while producing revenue in reducing private expenditure, it would probably do it less easily than an increase in indirect taxation of luxury goods. However, this is not a Budget debate. These are only suggestions thrown out, I might say irrelevantly, just for what they are worth.
If the Government decides to raise a certain amount of money for Government expenditure, the question whether it is raised by taxation or by borrowing is one of rather secondary importance. I think that possibly too much importance has been attached to that aspect in these debates and discussions. The emphasis should be laid, as I have laid it this afternoon, and as the Minister himself laid it very emphatically in the other House, on the balance of payments. The revenue and expenditure account is largely inside our own control. It is a domestic matter rather than an international matter. Whether we raise the money by borrowing or by taxation is really of rather secondary importance compared with the amount raised and the objects on which it is spent.
Taxation can be inflationary and borrowing need not be inflationary. The two issues tend to get mixed up in popular discussion. It is assumed that expenditure met out of borrowing is inflationary and that expenditure met out of taxation is not inflationary. That may be true, to some extent, but it is by no means a universal truth. If the borrowing is of a sort that can absorb current savings and if current savings can be attracted in the light of the future use of borrowings then the borrowing may be a great deal less inflationary than certain types of taxation. Any additional taxation that would raise the cost of living and thereby raise wages would certainly be more inflationary than borrowing net from current savings.
Therefore, it seems to me that there are three questions which the Minister has to try to answer. Can this disequilibrium be trusted to right itself? If left alone, will the gap tend to close? I suggested that it will but that it will not close entirely. To the extent to which it does not close itself, how far can the import-export balance be forced together by Government policy in the light of the capital programme and the repatriation programme? Having decided the extent to which it should be brought together, how should that forcing be done? In the long run, it may be done by expanding exports. In the short run, I am afraid it involves a diminution of internal expenditure. The Minister will have to decide how to impose this deflation on the community in such a way as to cause the least inconvenience and the least evil results. This is the opening of our national spring cleaning— beginning with the Estimates and the Central Fund Bill and ending with the Budget. At this point we are at the diagnostic stage in relation to the national economy. I have tried to throw some light on the evils from which the country is suffering. The cure is for the Minister and the cure will come in May when the Budget will be opened in the other House.
