I quite agree with Senator Hayes that this Bill cannot be treated as a routine Bill. It is fashionable nowadays for the Budget in every country to be a grand inquiry into the whole financial and economic position of the country. The debate in the Dáil ranged over such a very wide area that I think we are entitled to touch on a few of the matters dealt with in that debate here. So far as I am concerned, I propose to touch on very few aspects of the many matters which properly arise in connection with this annual review of the taxation system of the country.
It is fashionable in other countries to-day to regard the Budget as the regulator of the economic system. Almost in the way in which a tap can be turned on and off, activity can be generated by deficits and checked off by surpluses. That talk is very fashionable everywhere to-day. I think it is important to point out that that type of programme has only a very limited application in the circumstances of this country. A new adjective has been coined in recent years to describe this type of programme, after the name of the inventor or populariser of it, namely, the late Mr. J.M. Keynes. That adjective is Keynesian. I suggest that Keynesian programmes are not particularly relevant in Irish circumstances. The essence of the Keynesian programme is to generate new incomes to provide a demand for unemployed resoures. The problems in this country are not problems of unemployed resources so much as problems of undeveloped resources; these problems are not so much financial as physical; the type of unemployment we suffer from is not so much cyclical as what might be called structural. Therefore the generation of money incomes by means of Budget deficits and checking off of incomes by Budget surpluses is not so relevant as in other countries where there is a much greater development, far more resources, a greater state of progress and —as I will come to point out in a moment—far less constant preoccupation with the external balance of payments than we have.
The Keynesian programme became well known during the depression in the United States in the 30's. There is no question at all that the Keynesian policy and the Keynesian analysis were appropriate in that country, where there was a great depression and no preoccupation of any kind with the balance of payments; but the programme put forward by the Keynesians of the United States in the 30's has been seized on by inflationists all over the world and has been publicised and advocated in countries and in periods far different from those in the United States in the 30's. Inflation is always a popular policy, a policy for which politicians like to have a justification, and one of the troubles about the Keynesian analysis is that it does seem to provide some sort of respectable justification for inflationary policies even in times when these policies are not appropriate to the situation.
I have said that the characteristic of the United States economic system in the 30's, and still more to-day, is that American statesmen are free to make their programmes without much regard to the balance of payments. I should like in that connection to quote from what is generally recognised to-day as the most important and authoritative annual economic report, the Report of the Bank for International Settlements for the year 1952-53. On page 38 of that report, great emphasis is laid on the point I am trying to make now, and, in order to give stress to what I am saying, I propose to quote a paragraph from that report. That paragraph reads:—
"One thing which is often forgotten in connection with Keynes's analysis is that this analysis presupposes the conditions of a ‘closed economy'. When a country is as large as the United States (and moreover has ample monetary reserves) it may not be too unrealistic to assume that these conditions are present; but if European countries were to base their thinking on the subject of investment on this assumption, it is quite certain that they would overlook very important aspects of the programme. Thus, those who argue that a credit expansion leads either to the utilisation of ‘unused economic resources' or, if such resources do not exist, to an inflationary rise in prices are only too often leaving out of account one further possibility—namely, that the increase in monetary purchasing power may produce a gap in the balance of payments. Where this happens the additional monetary purchasing power may well be drained off through the purchase from the Central Bank of the foreign exchange required to pay for the surplus imports, and in these circumstances there may be no rise in prices nor, in the end, any undue increase in the volume of money. If the fiduciary credit expansion is not compensated by loans or grants received from abroad, the country's monetary reserves are bound to be reduced, as has been shown by the experience of so many European countries in the years since the war. That this should be the case is only to be expected; investment, whether in buildings, plant or equipment, or in stocks, uses up both raw materials and labour; the employment of additional labour will lead to an increase in the demand for consumer goods, and neither these goods nor the raw materials needed can be made to appear just out of the blue; they have to be provided either out of that part of the current national product which is not used for current consumption (i.e., from savings in one form or another) or out of resources obtained from abroad or from reserves".
I suggest that that quotation is one that ought to be borne in mind when dealing with the Irish financial system, because it has been characteristic of this country ever since the Treaty, with the execption of the few years of the war, that our balance of payments has been either barely in equilibrium or out of equilibrium.
It is fashionable to-day to talk about the repatriation of our external assets. We have already debated this so many times in the Seanad that I do not feel justified in taking up the time of the House in arguing the matter again. I will simpy say that there seems to be a general agreement amongst all Parties that such a process of liquidation of external assets can be justified only in order to build up productive investments yielding an equivalent return. A country which gradually uses up its external assets without replacing them by truly productive investment at home can be, I think, likened to the man who gradually eats into his inherited fortune. At the beginning of his life his income from investments provides a considerable part of his total income. As he gets older he liquidates his investments bit by bit and he has to rely for a larger part of his total income on his current earnings.
That is precisely what is happening in this country, which has been paying for a smaller proportion of its total imports from dividends drawn from abroad. In that way it becomes more and more imperative for it to rely upon its current output and exports to pay its way. In connection with this point, I should like to refer to an article in the Financial Times on the 12th May, based on an impor tant study by a well-known original thinker on financial matters, Mr. A.H. Abbati. The point of this study is that, owing to the liquidation of its external assets in the course of the war, Great Britain has now to rely to a much greater extent than it did before on the current earnings of its own population. All the generalisations in this article are equally valid for our own country. It points out:—
"Now it is a matter of elementary economics that the possession of overseas assets not only benefits the direct owners of those assets but also the economy at large of which those direct owners are members."
Well, Mr. Abbati is out to measure the number of people we, in the not so very different circumstances on this island, have been able to support because we use the income from our overseas investments to pay for food and raw materials. Disraeli wanted to destroy the idea of two nations, Mr. Abbati, heads one of his chapters: "The Concept of Two Populations"; one population we support by using indigenous food and raw materials; the other relies on imports, part of which are "free" imports.
The article then goes on to give figures showing that, owing to the loss of external assets, the section of the population which can rely on dividends drawn from abroad which used to be something like one-fifth of the total population of Great Britain, is now something like one-eighth. Similar calculations in this country would give a similar result and would make us pause before we embark on a policy of balancing out current accounts by the dissipation of the savings of past generations.
There is a certain amount of misunderstanding on this matter caused by the way in which it is frequently discussed. To advocate the retention of the savings of the past is not to urge that our savings should be lent to a foreign Government at 1 per cent. as the matter is frequently put. The alternatives are not between having the assets and having consumption. The consumption very largely depends on the possession of the assets. If the assets are not available the consumption must fall. It is only a very small part of our external assets which is lent to anybody at 1 per cent. Part of the assets held in the commercial banks and a greater part of the assets held in the Central Bank are invested in the London Money Market in securities which are so liquid that the rate of interest is very low. Those securities form an essential part of our external reserves. They are not only necessary for our liquidity, but in the long run, for our solvency, and to dissipate those assets lightly simply in order to pay our way from year to year would be to swap one asset for another and not necessarily for a better asset.
There is a passage in the report of the Bank for International Settlements on this matter which is so cogent that I make no apology for quoting it:—
"Consequently, when domestic saving is inadequate and the deficiency is not made up by foreign loans and grants, the new investment, ostensibly ‘financed' by credit expansion is, in reality, paid for by drafts on the monetary reserves. The country concerned has merely exchanged one type of asset for another. Only very rarely can such a course be advisable, for the purpose of ‘reserves' is, after all, that they should be kept in store to help withstand the exceptional financial strains which may occur in connection with the accumulation of commodity stocks and to provide for unforeseen circumstances in addition to meeting the demands resulting from ordinary seasonal disequilibria. Should the reserves be so slender that their further reduction could prove prejudicial to the maintenance of confidence in the currency or adversely affect the regular rhythm of trade and production, then there can be no doubt that the loss in reserves will more than outweigh the advantages derived from the possession of a few more public works or whatever other investments have been built up by means of the drafts made upon them."
I wish to come closer to the actual Finance Bill which we are discussing. What I have been attempting to suggest is that inflationary policies will produce disequilibria in our balance of payments, those disequilibria will lead to the loss of external assets and that the loss of the external assets in the long run is a process not to be endured. That brings me to consider whether the current Budget is inflationary or deflationary in its general tendency. Is the taxation imposed by the Bill now before the Seanad calculated to produce a pressure on the balance of payments of a kind which registers inflation in this country?
I think we can say right away that the Budget is not deflationary. The 1952 Budget was deflationary. I am not going to enter into any of the controversial questions as to whether if it should have been deflationary, how deflationary it was. We are all agreed that it was a deflationary Budget. This Budget is not deflationary. It imposes no new taxes. It reduces no subsidies. It does nothing to raise interest rates to a higher level. Assuming that the consequences of the deflation of last year's Budget have now worked their way through the system—and, I think, that is probably correct—we can say that the situation confronting us as a result of the Finance Bill is certainly no more deflationary that it was before.
It is difficult to say whether it could be described as inflationary. Perhaps the correct description would be to say that it has a potentially inflationary effect. To the extent to which it is unbalanced, of course, it tends to be inflationary. To the extent to which any deficit which it may provide for is not made up by new savings, it tends to be inflationary. The question we really have to ask ourselves is: to what extent is the Budget probably unbalanced? One could reasonably say that one is entitled to regard it as unbalanced until certain questions are asked. The first question is: are these economies which have been promised by the Minister in the Dáil really going to take place? The £3,500,000 reduction of expenditure still remains somewhat nebulous. The public, I think, would like to have some further details of where these economies are going to be made.
Another question on which the House is entitled to an answer is the future course of public expenditure. Legislation is at present proceeding through the other House which, if it passes, will, in its very essence, impose an additional burden on the taxpayer and on the ratepayer. Finally, we are entitled to be informed to what extent the capital programme envisaged in the Budget is truly productive in the sense that it provides the means of its own repayment and will not involve the country in any further deadweight debt.
The capital programme must also be examined in regard to its effect on the export position. Looking at the programme contained in the Budget speech—I do not want to weary the House with figures, but merely to quote a few—I see that the total amount in the capital Budget is roughly in the neighbourhood of £40,000,000. Looking over the main items of that, I see the first item is housing, over £10,000,000. This is a form of expenditure which, whatever its justification may be, does nothing to help exports. It is also only fair to say in passing, although it may not be strictly relevant to my argument to-day, that it is the most inefficient of industries. Housing is an industry which has been least mechanised, least brought up to date. If a certain volume of resources is to be spent in any direction, housing is the direction in which the Exchequer probably gets the least good value.
In this list, the only items that could be described as helping exports are: agricultural development, £4.7 million; turf development, £1.2 million; afforestation, £.6 million; fisheries, £.1 million; transport £4.4 million; and electricity, £8,000,000. Adding them all up, the total of the investment which may have a good effect on exports is about £19,000,000, roughly speaking, half the total. From the point of view of the balance of payments, that is a position that seems to require some justification.
That brings me to a matter which I dealt with in this House earlier this year, the necessity for a greater degree of control and planning of State investment. The Minister dealt with this matter in his Budget speech in the Dail—if I may say so without any disrespect—rather summarily. At column 1199, Volume 138, of the Official Debates of 6th May, 1953, the Minister stated:—
"Before leaving the subject of capital investment, I think it is necessary to deal with a certain proposal of which you have been hearing a lot of late. It relates to the establishment of a board to decide investment priorities and watch the effect of total investment on the balance of payments."
He then goes on to say:—
"Against our economic background, in which the basic limitation on national development is the low level of current savings, it is surely a misplacing of emphasis to give pride of place to a proposal for controlling and disposing of the nation's savings when the true national need is to induce our people to save as much as possible. From that point of view, indeed, the introduction of a formalised control of investment would be harmful; for interference with the investor's freedom of choice would discourage private saving."
Further on the Minister says:—
"Apart from interference with the freedom of individuals and firms to use their own moneys according to their own desire, we may take it that directives would be issued to banks, insurance companies, building societies, etc., as to the manner in which they should hold their assets. I cannot think of anything more calculated to discourage savings and to undermine confidence in the institutions through which savings are accumulated."
The comment I would like to make on that statement is twofold. In the first place, I suggest that there is a certain confusion in the whole of this discussion between the volume of saving and the direction of investment. Everybody is agreed that the total volume of savings in this country is insufficient. As I said earlier, savings are discouraged by the system of direct taxation. The volume of saving seems to me to be a matter which is related very slightly, if at all, to the existence of the type of investment council which I had in mind when I spoke on the matter before. I did not envisage that people should be controlled in the use of their own savings or that companies should have to seek permission from anybody for investing their savings in their own business. I did not even foresee the possibility of private investors and borrowers having to submit to Treasury permission before going to the market.
I am prepared to admit that at the present stage in regard to the investment of private savings by their owners, whether the accumulators or the borrowers, the test of profitability in a free market may still be the correct test for the best type of investment. However, what was in my mind and what was certainly in the mind of the Banking Commission in 1938, where this matter was discussed, is some more conscious and deliberate control of public investment than that which takes place at the present time. A larger and larger part of the total investment in the country takes place either through the Government or through Government-controlled corporations. At a time when the absolute volume of savings is scant, when private investment leaves a great deal to be desired, when the rates of taxation are so high as to discourage the production of risk capital, when the margins left over from the very large national Budget are getting smaller and smaller every year, it seems to me that investment by the Government should be very consciously directed towards improving the balance of payments situation.
I do not think that anybody who knows me in the Seanad or elsewhere could accuse me of having socialistic leanings, but I do think that the most extreme individualist at the present time must concede that every country with balance of payment difficulties must exercise some control over the nature of investment with an eye to keeping the balance of payments right. I suggest that the passage in the Budget speech which I have quoted does not dismiss the necessity for this degree of control.
This whole discussion regarding investment would, of course, be quite idle and quite pointless if the savings were not present to finance the necessary volume of investment. The connection between balance of payments and the maintenance of an adequate flow of savings is becoming more and more understood in every country to-day. On this matter I would like to refer to an article by an Irish writer of authority which has appeared in the Three Banks' Review of June 1953 and I would like to put on record the passage which is so relevant to our affairs. Talking about deficit financing, which I mentioned at the beginning of my speech, it says:—
"Thus, it may not be too optimistic to hope that in process of time each country can work out the particular mixture of plan and compensatory finances most congenial to it. For this to be successfully achieved, however, two things are necessary: first, international equilibrium must somehow be ensured in the sense that major balance-of-payments crises can be avoided; and secondly, equilibrium between the present and the future must be secured in the sense that a sufficient volume of savings will be engendered in the economic system, not merely to maintain the national capital intact, but also to ensure that the accommodation does not fall behind in the race for the application of new techniques. These two necessities are obviously interdependent, in the sense that a failure as to the second would continually endanger the first."
That is true of this country. The failure of sufficient savings to enable our agriculture and our industry to keep their costs down to the point where they could compete in the modern world would push our balance of payments into a permanent disequilibrium. Therefore it is a matter of the most extreme urgency now, at a time when foreign aid in any form is no longer available and when there is general agreement that the liquidation of external assets cannot be indefinitely tolerated, that savings at home should be encouraged to the maximum degree.
A great many people think that the present system of income-tax which is repeated in the Finance Bill will not have this effect. The Minister has at least conceded part of the claim which was made in this House in December, when he was asked to inquire into the system of income-tax. In the Budget speech he stated that:—
"Arrangements are being made to set up a committee to consider the question of the incidence of direct taxation on production."
That is a statement which we must all welcome. But while welcoming it, I think it is only fair to say that there are other aspects of income-tax in this Finance Bill which will not come within the terms of reference of this committee but which nevertheless call for a certain amount of inquiry and revision. I do not wish to repeat what I said in December, but in general I wish to remind the Minister that, owing to the very small section of the population on which this tax falls and the differential method of assessment on different classes of the population, the fixed income groups bear more than their fair share of the burden of the tax.
There are two grievances in connection with income-tax. The first grievance is its purely economic effects on savings and production. The second grievance is the injustice which it imposes on certain classes of the population. The inquiry which the Minister proposes to set up may tend to remedy the first evil of the tax, but there is nothing in the terms of reference to remedy the second evil of injustice on a small section of the population. I quote from a memorandum which, I understand, the Minister has already received from the Conference of Professional and Service Associations, where this point is pungently made:—
"The hardships which an iniquitous and anomalous tax code imposes on heads of families and their dependents does not, apparently, deserve priority of investigation to the incidence of direct taxation on the capital requirements in industry itself. One wonders what influences were brought to bear on the Minister to convince him of this, and is his decision in the matter another example of political expediency taking precedence over human rights and civic justice?"
Now the reason I mention this matter is that I think it is peculiarly the function of the Seanad to draw attention to the anomalies in the income-tax code because the very essence of the injustice of the tax is that only 1/17th of the population pays it and that therefore any attempt to improve the situation will attract only 1/17th of the population and may arouse the suspicious of 16/17ths. The number of people who pay tax is only 1/17th, therefore the number of people who could benefit by any change in the tax system is only 1/17th, so that the 16/17ths of the population who do not pay tax are always liable to find themselves worse off as a result of any change. Therefore it is a matter in which there is no expectation of popular clamour. It is not a matter in which there is a great deal of voting strength, and it is because of these very peculiarities that I consider it the duty of the Seanad to repeat these matters over and over again whenever we have the privilege of the Minister's presence in the House.
It may be said that the present Budget does not make things worse, that there is no change, that it is neutral; but if you have a disease which is slowly eating into the system the fact that there is no change from year to year in its gradual corrosion does not necessarily say that the treatment is neutral. A mere policy of no change where there is injustice is not neutral. It is perpetuating injustice, perpetuating an injustice that ought if possible to be repaired. However, as I have said, my principal reason for referring to income-tax is its effect on saving and on the balance of payments. I know that it is a fashionable theory in other countries to-day, although it is going out of fashion slightly, that private savings now can be very largely dispensed with and their place taken by forced savings of one sort or another.
In the Soviet Union, savings are obtained by a high purchase tax and by compulsory loans. In other countries, they are obtained by high direct taxation and Budget surpluses. These are the fashionable methods of providing savings for production in countries where, owing to egalitarian policies and a reduction in the standard of living of the richer classes, the flow of private savings can no longer be relied upon to provide enough capital for industry. On that, I would like again to draw attention to the Report of the Bank for International Settlements, where this matter is discussed. I will not quote the whole paragraph, but simply refer to page 68. The report points out that Budget surpluses tend to be spent on current consumption, that Ministers of Finance who find themselves with Budget surpluses, instead of using these surpluses for the repayment of debt or for true capital investment, tend to be pressed by their followers and politicians to increasing the national expenditure. It also points out that Budget surpluses can only be obtained by high direct taxation. This taxation undermines the flow of private savings, which are a much more desirable source of the finance of investment. The forced saving which results in Budget surpluses may simply transfer purchasing power from one pocket to another without providing any new funds for investment at all.
The outstanding aspect of our direct taxation, which is perpetuated in this Finance Bill, is the high system of progression. That high system of progression has been inherited from British models and these models in their turn have been based on various rather outworn social philosophies which have not been widely adopted in other countries in Europe or elsewhere. We have taken over high progressive taxation almost as something which is self-evident. We have assumed, ever since the beginning of this State, that direct taxes—income-tax, surtax and death duties—should be levied at a rate which brings about a considerable equalising of distribution of income of the population. That is a principle which is not self-evident. It is widely adopted in Britain to-day as a reflection of a long inheritance of socialist policy; but the rate of progression in our taxation system is a great deal higher than that in almost every other country to-day.
All I want to suggest is that, whether this progression is justifiable or not, it must not be taken for granted. There was recently an event in Czechoslovakia which aroused considerable comment. There was an exchange of a new currency for the old and the exchange was on a basis that wealthy people obtained a smaller amount of new currency in exchange for old currency than the poorer people did. In other words, there was a differential calculation in regard to people's rights, according to the amount of wealth they possessed. That transaction has been regarded with horror by commentators everywhere in the free world; yet I myself fail to see in what essential respect it differs from what the Minister for Finance in this country is doing every year in his Finance Bill. The people of this country are being taxed at different rates simply because some of them have the misfortune— shall we say?—to be better off than others. That may be a valuable principle of taxation; it may be one which, on the whole, produces good results; but it is one that seems to me to require a further justification than the mere fact that it has entered into the philosophy of a British egalitarian socialist mode of thought.
I would like to ask the Minister, if he has a moment, to study the paper by Sir Roland Nugent, the ex-Minister of Commerce in Northern Ireland, read before the Statistical Society, in which he pointed out that the whole system of income-tax taken over from Great Britain is inappropriate for Northern Ireland conditions, that the system of forced saving which this tax is meant to effect may be all right in Great Britain, where the Budget surpluses are used for the repayment of debt and in that way provide real savings, but that it is quite inappropriate in Northern Ireland, where Budget surpluses go elsewhere. This gentleman went so far as to say that the whole system of income-tax in Northern Ireland requires fundamental revision. If that is so in Northern Ireland, may I suggest that it is equally true in this part of Ireland?
Before I leave income-tax, I want to refer to one other small matter, that with which I dealt last December—the income-tax allowances for disease, illness and operations. I wish to congratulate the Minister on one section in the Finance Bill, where the principle of remission of taxation for life insurance policies is carried rather further than it was. That is definitely a step in the right direction. I suggest that insurance policies against illness might receive a somewhat similar differential rate of tax. The urgency of this matter has become greater since I spoke here before. If the new Health Bill passes into operation, people with under £600 a year will receive certain benefits free, which people with over £600 a year will still have to pay for. If people in the higher income groups could receive some sort of income-tax concession for the provision that they themselves make against the risk of illness, the pressure for the widening of the classes included in the Health Bill would be, I suggest, considerably reduced. As it is, the people with over £600 a year who are income-tax payers will now have to pay more than they did before in order to help to provide the benefits for the favoured classes in the Bill. I suggest to the Minister that there is a case for consideration there.
There are two small matters to which I would like to refer before I conclude. The first is a certain amount of concealed taxation which is going on at the present time. I am not referring to the rise in postal rates. I think it is right that the Post Office should pay its own way. I also think that that principle of the Post Office paying its own way might be extended to Radio Eireann. A small increase in the licence fee would produce such an additional revenue that Radio Eireann would be entirely independent financially. That, I think, would be from many points of view a move in the right direction.
The concealed taxation to which I refer is a payment which is still exacted from large classes of women, of 9d. a week for widows' and orphans' pensions. The Social Welfare Act enables the Minister to exclude certain classes of people from its operation and he has, in fact, done so to a very large degree; but there is one payment which still remains even on the excluded class and I have been asked by certain people who suffer from it and by their representatives to raise the matter to-day. A great many classes of women lose their employment on marriage and for those women—civil servants, national teachers, local authority officials, bank and insurance officials—to have to pay 9d. a week for a risk which is exceedingly remote, really amounts to a form of concealed taxation. It is very severely felt by the organisations representing these professional classes and I have been asked to raise the matter and to call the Minister's attention to it.
I come now to the matter of the Civil Service award. As I understand the Minister's position, his refusal to implement the award in the course of the last financial year was based on his ignorance of the amount of money that would be available. He stated that, in these circumstances, it was "in the public interest" to withhold the implementation of the award. The point I want to make is that every Exchequer and every Minister for Finance must always, to some extent, be in the dark regarding the future course of revenue. If ignorance of that kind could always be pleaded as a reason for not giving effect to an arbitration award involving additional expenditure, it seems to me that there would be no point whatsoever in having any type of arbitration between the Government and its own servants. It could always be pleaded that the award could not be brought into operation because the Minister did not know the future fiscal position.
