This is the one occasion on which the Seanad has an opportunity of discussing the whole financial system of the country from the point of view of revenue, as apart from expenditure. It is really the nearest thing we have in this House to a debate on the Budget. The Finance Bill comprises the Financial Resolutions passed after the Budget has been introduced in the Dáil. Therefore, it gives us an opportunity of expressing our views on the various matters that arose in the Dáil in the Budget debate. At the same time, we must limit our discussion to matters immediately arising out of the Budget and the proposals made therein.
We cannot raise, much as we would like to do so, such general matters as the Common Market, and other matters of that kind which do affect us but which would, at the same time, bring us too far afield. I think that, in so far as we discuss general economic matters, they must be related to the Budget and the Finance Bill. That, of course, still allows us a very wide field, because the Bill and the Budget must be drafted against the economic background of the country. The economic background is not only our domestic situation but also the world situation. There are very few countries which have more open economies than ours. Practically everything that happens in the outside world can affect our position here. We are not self-sufficient. Our external payments form a large part of the total transactions and, therefore, we are very sensitive to outside influences, unlike great aggregates like the United States of America and the Soviet Union, which are very much self-contained.
I read recently an article by a distinguished foreign economist on the Irish economic situation. The impression he gained from the published figures was the great extent to which the Irish economy is affected by outside influences. He went so far as to say that almost every change in the statistics in recent years could be related to circumstances outside our control. To some extent, that makes it easier for the Irish Government to bask in times of prosperity. I want to quote from The Times of 28th June on the position of Sweden. This extract is, I think, relevant to our affairs:
The more Sweden's economic growth is thought to depend on growth outside Sweden, the less credit is given to government policies encouraging growth. A trade union economist asked recently: could any government be so bad in Sweden that it could prevent Sweden's economy expanding while Europe grew so fast?
I think it is probably true that if the British and the European economies were rapidly growing, it would be very difficult for any Irish Government to prevent the Irish economy growing also. The converse is that if the British and the European economies were running into recession, even the most perfect Government in this country would find it impossible to isolate the country from the effects of that decline in our outside markets.
Our economy is so open that, if we are talking about the economic background, we cannot confine our remarks entirely to the domestic situation. The economic background at home and abroad of course influences the Finance Bill and the Budget which the Minister introduces and, of course, the Budget itself influences the economic situation. There is a mutual reaction between the economic situation of the country and the Budget each of which influences and is influenced by the other.
That is particularly true in what economists are accustomed to call the short period, because the Budget has a very important part to play in the maintenance of equilibrium in the country's external balance of payments. A great deal has been said in recent times about some distinction between the aims of Government policy on the economy, the aims of stability and of growth. If we look at the report of the Central Bank, we find that growth and stability are regarded as aims of policy in this country. I want to quote now from page 14 of the report of the Central Bank:
The object of the framers of economic policy, both in individual States and in the various international groups and associations, is the promotion of expanding production and trade, combined with full or nearly full employment and without the sacrifice of monetary stability. The pursuit of this object is attended by difficulties and setbacks even in well-developed countries possessing very great natural resources and growing populations.
One might get the impression from that quotation and from a great deal of other current literature that the objectives of growth and stability are in some way inconsistent and opposed. That is not really the case. Each depends on the other. Growth of the economy depends on the maintenance of equilibrium. If the economy were allowed to become unbalanced, deflationary corrective measures would have to be taken to meet the adverse effects created. It is, I think, a legitimate criticism of the policy of the Government in Great Britain in recent years, that disequilibrium in the balance of payments has been followed by deflationary corrections, which have slowed down the rate of growth. On the other hand, stability in the balance of payments depends on the economy growing, which depends on more production and especially a growth of exports.
It is encouraging to read the opinion of the Central Bank, as stated at page 16 of the Report:
Nevertheless, the fact that substantial progress was achieved with little price inflation and without difficulties in external payments affords a basis for confidence in the ability of the Irish economy to continue to expand in conditions of monetary stability.
Therefore, as I say, there is no real conflict between the aim of growth and the aim of stability. Each, in fact, depends on the other. At the same time, it must be admitted that the problems connected with the maintenance of stability and those connected with the maintenance of growth are rather different. The Government have, as I say, different problems which may require different solutions.
It may perhaps be an over-simplification to say that the maintenance of stability is a short period problem and the maintenance of growth a long period problem; but, just assuming that over-simplification for the moment, it may perhaps be said that the maintenance of stability depends primarily on the avoidance of inflation, and that in the short period the aim of every Government and every Central Bank must be to avoid inflation and, in doing so, to use all the available weapons which can be used for that purpose.
Those weapons are usually classified into monetary and fiscal weapons. In recent years, monetary weapons have been becoming less important than fiscal weapons all over the world.
The reason for that is, I think, partly the restoration of convertibility of currencies which has led to such free movements of funds that changes in interest rates to preserve internal equilibrium have set up undesirable flows internationally of what is known as "hot money". There seems to be a swing of opinion to avoid maintenance of equilibrium by merely monetary measures which may involve disturbances in the world as a whole which should be avoided.
I should like to refer to the Twelfth Annual Report on Exchange Restrictions published by the International Monetary Fund. I quote a short summary of that report in The Times of July 7th:
The Twelfth Annual Report on Exchange Restrictions 1961, published by the International Monetary Fund stresses that the cumulative effect of getting rid of exchange restrictions in recent years has been to restore to foreign exchange markets "their traditional function of reflecting the trend of international financial pressures". This has had two effects. In the first place as more and more currencies have become convertible and more barriers have been dismantled, exchange markets have experienced relatively smaller movements in exchange rates and relatively larger movement of liquid funds. The market mechanism has become far smoother in operation. But this in turn has led to the second development. It has meant far greater interventions by monetary authorities to offset the large switching of funds from one centre to another.
Thus as the I.M.F. gets nearer to its aim of removing all restrictions on the movement of funds (it can now say that "virtually every currency which is used in financial international trade is now convertible in terms of the Fund Agreement, and virtually all of the trade of the other Fund members is conducted in these convertible currencies"), the main problem is how to shield countries from the actions of others and how to counteract the flow of speculative funds that occasionally burst out. This report may mark the end of an important phase in postwar monetary experience. The outlines of the next phase are still being shaped by the I.M.F. and the world's leading central banks.
The point of that quotation is that the independent utilisation of monetary weapons by individual countries is leading to such international disturbances that the International Monetary Fund and other groups of central banks are engaged in damping down these effects. There has been a switch in recent times from monetary to fiscal regulations. This is not so apparent in this country because the monetary regulators have never been very effective here because of the peculiar structure of the Irish monetary system. The lack of independent interest rates in this country has made the interest rate mechanism unsuitable for the maintenance of monetary stability and fiscal controls in this country have always been of great importance. These are the controls contained in the Budget and that is why I mention them in this debate.
One of the advantages of monetary regulators is their flexibility. They can be operated frequently through the year at short notice, whereas until recently one of the disadvantages of fiscal controls has been that they can be introduced only in the annual Budget. An interesting development has been taking place in recent times in this matter. The British budget this year has introduced a number of interbudgetary controls, fiscal controls which can be operated between budgets having the same flexibility as the bank rate. The Government has the power to vary purchase tax, excise duties and insurance contributions without special legislation. The only similar control in this country is the power to regulate hire purchase contracts.
I should like the Minister to indicate in his reply if he has considered the possibility of introducing any interbudgetary controls in this country analogous to those recently introduced in Great Britain. The report of the United States Economic Advisory Committee recently recommended that the President should have power to vary rates of income tax between budgets. That of course would be a very far-reaching revolution and the reason I mention it is to show that there is a swing away from the monetary controls which have the advantage of flexibility towards fiscal controls which until recently had the disadvantage of being capable of being applied only at long intervals. I should like the Minister to tell us whether he is considering the possibility of adopting some of these interbudgetary fiscal controls adopted in other countries.
In the short period, when the maintenance of equilibrium is the immediate objective of policy, the figure that has to be scrutinised is the balance of payments. The balance of payments for the year 1960 was satisfactory. There was a deficit of less than £1 million compared with a deficit of £8.7 million in 1959.
Taking the period 1957 to 1960, the balance of payments in this country was roughly in equilibrium. Therefore, there is nothing in the balance of payments situation at present to call for a deflationary correction. This is stated by the Minister in his Budget speech. It is stated in the Central Bank Report at page 8:
There was little significant change in the country's aggregate external monetary reserves. In these circumstances the fairly considerable and continued expansion in lending and investment by the financial institutions did not give rise to concern.
When we come to make some sort of forecast for the present year to which this Budget applies, I think there is general agreement that the balance of payments situation in 1961 will not be as good as it was in 1960. In the first five months of the year, the deficit on the visible account was £6 million more than in the corresponding period last year. Even if the situation improves in the later months, as it usually does, a deficit of £5 to £10 million in 1961 is quite a possibility. If such a deficit should arise, I suggest to the Minister that there is no reason for anything in the nature of drastic deflationary correction, that the deficit in the balance of payments will be almost certainly neutralised by a capital inflow. From the point of monetary policy, the state of the reserves is the most important consideration and, if the current balance of payments is neutralised by an equivalent capital inflow, there is no reason for imposing the hardships of deflation on the country. Since I formed that view it has been clearly confirmed in the Report of the Central Bank which states on page 8:
Assuming, however, that net invisible receipts do not fall and provided that any worsening on the trade account is of moderate amount, such deficit on external payments as may be incurred in 1961 need not be regarded with anxiety, especially in so far as it may be associated with the importation of capital goods and industrial materials.
As I said, there has been a swing of opinion regarding the part to be played by monetary and fiscal controls in maintaining equilibrium. I think I am correct in saying that there has been a similar swing of opinion away from imposing deflationary corrections for short period deficits in a country's balance of payments.
In recent months, the Central Banks in Europe have been nursing sterling. They have been refraining from selling pounds in the Exchange market, with the result that they prevented a run on sterling that might have had serious consequences. In other words, the international monetary institutions such as the Bank for International Settlements and the International Monetary Fund try more and more to protect countries from the necessity of inconvenient deflations. At the same time, I think it must be emphasised that such restraint and such assistance are valid only in the short run. What they do is to give countries a possibility of taking the correct action at home. They give countries a chance of buying time.
They are exactly the same as a man who borrows from the bank in order to increase his liquidity during a period of temporary difficulty. That increase in liquidity may restore his solvency, if he takes other appropriate measures. On the other hand, if he does not do so, it may make his difficulties worse. It is the same internationally. These efforts by international monetary institutions to nurse national currencies, to prevent them suffering from the consequences of runs caused by short period deficits, are only temporary expedients and, just as a man cannot restore his solvency by additional doses of liquidity indefinitely, a country cannot do it either.
Therefore, if a small deficit should occur, I do not think that, in the present climate of opinion, drastic corrective measures are necessary. At the same time, it must be recognised that deficits cannot be allowed to continue and that if international assistance allows a country to buy time to put its affairs in order, a country has a very stern duty to do so. That brings me from what I said could be conveniently described as the short period problem of maintaining equilibrium to the long period problem of building up growth in the country.
When one comes to this longer period problem of growth, one is concerned not so much with monetary and banking figures as with the figures of production, employment and prices. The year 1960 was a satisfactory one. The net volume of agricultural output increased. The net volume of manufacturing output increased. The national income increased by something like five per cent., which is satisfactory. As far as one can forecast the present year, assuming an average harvest, agricultural output and prices should remain steady. Industrial output should increase by from five to seven per cent. Industrial employment should increase by about 7,000 people. The tourist industry is shaping very well.
There are two unknowns in the equation—one is our own harvest and the other is the state of the British economy. Assuming an average harvest and assuming that the corrective measures taken in Great Britain in the next few months will not be so stern as to damp down demand for imports, the prospects for 1961 seem reasonably bright.
When we come to consider progress in any country, prices are as important as production and employment. Continued progress depends upon the maintenance of equilibrium in our balance of payments, and equilibrium cannot be attained in the balance of payments if exports are so expensive, so dear, as to be priced out of the external markets. Ours is an unusually open economy. We have to meet competition from an unusual amount of imports at home and we have to sell a large volume of exports abroad.
I do not wish even to touch on the vast problems connected with the Common Market, but any extension of the areas of free trade or lowering of tariffs in Europe which may take place —and some such extension will certainly take place—will impose on every country in Europe the very severe duty of pruning down its costs. In the recent discussions about the Common Market and the consequences of greater integration between this country and European countries, sometimes people seem to lose sight of the fact that to some extent we are in a common market already with Great Britain; that the relations between Great Britain and the Irish Republic have many of the features which will characterise the Common Market when it is fully developed. I refer to the free movement of labour and the free movement of capital.
Already we have the experience of competing in a larger economic unit in which we cannot shield ourselves very successfully but, with the extension of the tariff-free areas, there is no question at all that competition will increase. That is one of the purposes of the expansion. Not only will our exports encounter more difficulties abroad but goods produced for the home market will encounter more difficulties from imports from other parts of the area.
Therefore, while it is true at all times in every country that the reduction in the cost of production is an object of primary importance, it is particularly true today, when we are, I am certain, entering into larger economic areas where the protection of tariff barriers both ways will tend to disappear. Therefore, taking the longer view, the duty of a Government in this country at the moment must be to try, as far as possible, to minimise costs of production, costs of production of all kinds, not merely labour costs which usually figure very largely in this discussion but costs of production of all kinds.
I should like to refer to the Central Bank Report, page 16:
With the progressive elimination of trade barriers between the members of the European economic groups, our position in the British and other markets will become increasingly difficult unless we can make our products more and more competitive in price and quality— and this is true whatever the future relations of Britain or Ireland with the European Economic Community may be. The necessary increase in our competitive power will not be possible without co-ordinated effort by management and labour. On the one hand, profits should be invested, to the maximum extent that may be reasonably practicable, in the enlargement and improvement of productive capacity. On the other hand, moderation is necessary in respect of wage and salary increases, so that the efforts to improve our competitive position may not be hampered and that economic growth may not be endangered by too rapid expansion of current expenditure with a consequent decline in the resources available for capital investment. Our dependence on exports sets a limit either to the level of wage and salary, earnings which can be achieved with as full employment as possible or, alternatively, to the volume of employment which can be achieved at any given level of earnings.
So when I refer to the reduction in the cost of production, I am not suggesting in any way that the trade unions are the only people who tend to keep costs of production up.
Every inefficiency in business, every restrictive agreement amongst business people, every restriction on competition has that effect. At the same time, I must admit that the principal cost of production is of course the cost of labour. I should like to refer to a report of the O.E.E.C. on the necessity for national wage policies in the various countries which are going to take part in the Common Market. I do not wish to quote at length from this report. It has been fully referred to in the Press but the main point is that, in many countries, upward pressure of wages has produced a cost inflation. By cost inflation, I mean an inflation which is caused by costs of production rising which involves rises in prices as distinct from demand inflation which is the result of excessive income generation within the community, caused possibly by unbalanced budgets or excessive Government expenditure.
This distinction between cost and demand inflation is very important in regard to policy because measures which may correct demand inflation, the fiscal and monetary controls to which I have already referred, may be quite helpless in the face of a cost inflation. I do not wish to digress in the Budget debate by discussing labour problems. There will be an important conference in Dublin next week summoned by the Federated Union of Employers when Dutch visitors will explain the system by which wages in Holland have been very successfully regulated to avoid inflation in recent years. On that, I would say that there is nothing sacred in any European system, that other countries' backgrounds are different from ours, but at the same time, we have a great deal to learn from what is happening elsewhere.
I think, if one were asked very shortly what was the object, the criterion, of a successful wages policy, the answer would be that increases in wages should be limited to the point where they would not cause rises in prices or unemployment. If either of those appears, an inflation has occurred and, as I said, that is an inflation which is not sensitive to the monetary and fiscal regulators which can be used to deal with demand inflation.
In this debate, we are discussing matters with the Minister. The question is: what can the Government do in regard to pursuing a reasonable wages policy? All I say on this very large subject is that the Government can at least do something negatively by resisting policies of taxation or tariffs which might put up costs in such a way as to give trade unions a claim for increases in wages caused by a rising cost of living. The Government can also refuse to raise wages in the public services and in the sector of the economy over which they have some control.
In that regard, I quite sympathise with the Minister and I agree with what he said in the Budget speech:
As regards costs it must, of course, be borne in mind that rates of pay are for the most part fixed by conciliation and arbitration machinery and that a significant influence is exercised by the level of pay in outside employment. Public Service remuneration follows, rather than sets the headline for, pay trends generally.
The reference is column 669 of the Official Report of Wednesday, 19th April, 1961.
That, I think, is reasonable and true. At the same time, I think the Government have a duty to throw their weight against increases of wages which may produce inflationary effects. Such increases may raise costs of production and prices or cause unemployment. I think, in view of the increased competition in recent years, there is perhaps no more important objective of Government policy than this and no department of policy that calls for greater courage and greater determination than to do something which may be unpopular and which may, on the face of it, appear retrograde and inhumane.
Perhaps I have wandered too far into general public policy. I now wish to turn to the Budget itself. The out-turn of last year's Budget is such as to warrant a progressive policy this year. There is no need to put the brake on the system. The Minister is perfectly justified in slightly pressing down the accelerator which is what he has done in this Budget. I think that is generally agreed. Certainly it is the opinion of the Central Bank in its latest report. The estimate for the present year seems reasonable and, as the Minister said, the small surplus which is budgeted is not the end but only the beginning.
I think we can all agree with the four objectives which he hopes to obtain from the Budget—that social welfare beneficiaries share in the improvement in the national income; that farmers should get greater help to increase production; that appropriate provision should be made against Supplementary Estimates; and that the burden of direct personal taxation should be lightened. Certainly, I cannot sufficiently emphasise my agreement with the fourth of these objectives. The Budget has shown a shift from taxation on earning to taxation on spending and that is a shift in the right direction.
Taxes on earning have a disincentive effect. They have a disincentive effect on effort and a disincentive effect on savings. They invite evasion. They cause widespread discontent. Taxes on spending are less felt and can be much more easily evaded by people changing their consumption habits, and they have less of a disincentive effect on saving. Therefore, we must all applaud the Minister for his reduction in the standard rate of income tax, which is quite substantial, and for his reduction in surtax because every single surtax payer will be paying less than he did. These are moves in the right direction.
In regard to death duties, the last of the three direct taxes, it is one in which the Minister might perhaps show a little more adventure. Death duties are an objectionable tax from any point of view. They have a disincentive effect on saving. His move in the present Budget is definitely a move in the right direction, but I hope the Minister will consider further moves in the same direction in future years.
One thing which we must all welcome is the intention to simplify and codify the direct taxation code. I should like to congratulate the Government on the White Paper which is a very important document dealing with direct taxation. It amply repays study. It shows a certain willingness to approach these difficult problems with an open mind and again I welcome the intention of the Government, as expressed by the Taoiseach, to consider the whole question of the incidence of the burden of local taxation. The Taoiseach stated at the opening of the Economic Research Institute last month that this is one of the matters which the Institute would be invited to investigate.
I think perhaps I might on this occasion publicly pay tribute to the great generosity of the Ford Foundation which has endowed this very well-endowed Institute to pursue inquiries of this kind. We have had a very excellent statistical service for many years but what the Institute will do will be to interpret the statistics and use them as the basis of forecasts. This will be of the greatest possible value to the Government, to business and to the public.
The last matter to which I should like to refer is the Capital Budget. In this, there has been a swing of opinion from the thirties when the Banking Commission Report was being drafted. I think that in every country in the world more investment by the Government and by public authorities is approved today than would have been approved then. A great deal of the investment is self-liquidating and it must be entirely approved. A great deal more is productive in the indirect sense that in the long run the assets may pay for their own production, but a great deal of it cannot pretend to be either self-liquidating or productive, except in a very roundabout sense. Educational and health services have a social justification. Other services may have what might he called a prestige justification.
In investing a great deal of capital in public enterprises of one sort or another, this country is in line with other countries in the rest of the world. Therefore, we must not be too conservative in criticising additions to the debt caused for these purposes. On this matter, I should like to refer to a valuable paper read by my colleague, Mr. Lynch, at the Irish Transport and General Workers' Union delegate conference in Galway last month. This paper deals with this whole problem of public investment and public enterprise and a number of things are said in it which I think are worth taking to heart. I will quote one or two sentences from the Irish Times report of the lecture. It stated that the lecturer believed in public enterprise as a distinctive and rewarding method of using human and material resources for the common good. The report continued:
Public enterprise had advanced economic development, it had improved the general welfare to an extent that would otherwise have been impossible, and its full potential had not yet been fully appreciated, much less realised.
It was widely used in Ireland, but it was often regarded—and described as a second-best expedient, as something to be tried where private enterprise had failed. There need be no conflict between private and public enterprise in Ireland; on the contrary, both were complimentary.
Having said that, I think it is only fair to say, before I conclude, that public enterprise must conform in many respects to the same criteria as private investment and cannot be regarded as an end in itself. Public enterprise depends on the accumulation of savings by individuals. It depends on investment and on those savings being translated into real capital goods; it depends on competent management; it depends on satisfactory labour relations. I do not wish to return to that question which I have already discussed, but labour relations in the public sector in this country are of vital importance in view of the extent of public investment. Therefore, as I said, any policy by the Government in relation to wages must attend to the question of wages in public utilities over which the Government have a measure of control. Successful public investment depends on the skill both of labour and management. It depends on the adoption of the best technical advice and it should also be, so far as possible, subjected to the accountancy test of profitability.
The lecturer said:
Public undertakings should be an example to private enterprise. They should be examples of emulation not merely to private firms but to one another. Ultimately, they should compete with one another; in this way a nationalised firm could galvanise a whole industry in innovation, research and efficiency.
The lecturer suggested that "We might use native capital and skill to promote fresh ideas without waiting for the foreigner." Having said that in favour of the large amounts of public investment provided for in the Budget, I should like to issue just one note of warning. In recent times, the idea seems to have grown up in many countries that investment is an end in itself, that, if there is enough capital investment, a country's progress is assured. That is a dangerous fallacy because investment may be wasteful. It may be wasteful either in the private or the public sector. Therefore, the modern tendency is to try to subject public investment, unless it is for purely social objectives, to the accountancy test which private industries have to face.
I want to quote from the leading article in the Financial Times of 3rd July on this subject:
There is now growing evidence to suggest that investment by itself does not necessarily produce growth. Norway, for example, devotes a larger proportion of its national product to capital formation than any other western European country; but it has one of the lowest rates of growth. The reason is that it has tended to invest unwisely, or at least in projects with a very low rate of return.
The mere amount of investment is not enough in itself. The direction as well as the amount must be considered.
That lesson from Norway should be borne in mind here especially in view of the fact that there is a capital shortage in Ireland. In his Budget speech the Minister praised the efforts of the savings associations but he pleaded for a greater amount of savings. That plea is echoed in the Report of the Central Bank in page 9:
In connection with the recent budgetary measures, it needs to be fully appreciated that reductions in rates of taxation and other reliefs in income can have the effect of promoting sustained economic growth only if the resulting increase in spendable incomes is matched by increased economic effort. Saving and the enlargement of the funds available for productive investment should be a first charge on increases in income...
As I said, the Budget itself has done something to help savings. There is a reduction in the rate of direct taxation which has definitely increased the power and the will of the community to save, and it is to be hoped that the community will respond. It must be remembered that quite a small change in the rate of saving by individual people can produce very large accumulative results. One thing at the moment which may help the Minister in his plea for increased saving is the very high rate of interest. If small savers are allowed to participate in the high rates of interest, savings may be stimulated.
Of course, an increase in the rate of interest, while it may increase savings, must make the Minister think twice before he incurs additional public debt. The British Budget this year was described as counter-inflationary. The way in which that counter-inflation was provided was that such a surplus was provided over the line as to exempt the Government from having to appeal to the capital market in the course of the coming year. The Minister's Budget, as I have said, was not deflationary or counter-inflationary. I said that, quite rightly, he put on the accelerator rather than the brake. The result is that he will have to appeal to the capital market in the coming year, and he will be appealing to the capital market at a time when the long period rate of interest is quite exceptionally high.
I think I am correct in saying that the yield on long-dated British Government stocks is higher today than it ever was in history. As the rate of interest in this country necessarily moves in sympathy with the British rate, the Minister will be approaching the capital market at a time when he will be asked to pay a very high price for accommodation. That should make the Minister chary at present of indulging in any further capital expenditure.
