The performance of the economy during the period of the previous Minister for Finance is certainly disturbing and must give rise to very general concern. Looking first of all at the present economic situation, it is evident that in the first half of this year the economy was in a state of complete stagnation the likes of which had not been experienced for quite a few years. We know that in manufacturing industry output was lower in the first half of this year than in the first half of 1965 and that reductions in output were widespread in such industries as food processing, brewing and malting, tobacco, textiles, paper—we must exempt the Government in that respect because this industry was affected by a strike—printing, building materials, metal products, non-electrical machinery, car assembly and the miscellaneous products sector.
In all of these there was a decline in output reflecting the impact of faulty Government policies during the past two years. In the building industry, as mentioned in the report of the Central Bank published recently, output also fell considerably during the first nine months of this year, a trend so noticeably at variance with all the confident forecasts of the previous Minister for Local Government, now Minister for Agriculture, that some apology is owed to the building industry from that Minister and from the Department of Finance for the attempts to mislead them in the early part of this year when those Departments flatly refused to face the facts of what was happening in the building industry. They distorted the figures in presenting them and tried to persuade the building industry, which had already faced a declining output in the preceding months, that what was happening was not likely to cause a decline in the building industry.
In agriculture, similarly, the administration of the Government's policies over this period has produced unsatisfactory results. The growth in the number of calves has been somewhat smaller than either of the two preceding years. The growth was 6 per cent in 1964, 10 per cent in 1965 and only 2.3 per cent this year. Milk output was also down in the first half of this year.
The Central Bank points out that in the first eight months of the year there was a significant decline in the volume of expenditure. As far as investment is concerned, the Central Bank again refers to a substantial decrease in the import of capital goods which reflects the trend of the machinery part of investment in the first half of the year. Of course, I have already referred to the Central Bank's remarks about the building industry. We have, therefore, stagnation in consumption and declining investment. There is evidence of some improvement in the second part of the year but this is not sufficient to secure anything like the Government's aim for this year.
The Economic Research Institute recently forecast that in the current year national output would increase by only 8 per cent. An examination of the figures would suggest that this is optimistic. They assume maintenance of the volume of investment in arriving at that figure. The Central Bank do not agree with this. They remark indeed that unless industrial investment goes up very significantly there will be no significant increase in gross national product in 1966.
This is the picture we have at the present stage as to the condition of our economy. This loss of growth will not readily be made up. Last year we are told by official estimates that the national output rose by 2½ per cent. This year, it is unlikely that it will rise by as much as a half per cent. Therefore, in those two years, our economy has advanced by only 3 per cent. whereas according to the targets set, it should have risen by 8¼ per cent. We are thus 5 per cent behind. At the present rate of progress, even allowing for some recovery in industrial output, it is estimated that in 1967 we will show a rate of growth slower than that projected. Therefore, over those three years as a whole we will have lost something like two years' progress towards the targets, which we are most unlikely to make up.
How has this happened? It has happened because we have experienced some difficulty in a number of quarters. There is no evidence that this is due to external factors. Economic difficulties faced the country in 1951 and those difficulties were largely attributable to the Korean war. On this occasion there is nothing similar. The Government have made some comments on the UK import levy but this is not the complete cause. It must be said that the Government's policy in dealing with this by giving subsidies to Irish industries has largely alleviated the effects of this levy. As the Government measures were effective in this regard it cannot be held that the import levy was a serious factor affecting the progress of our economy in 1965 and 1966.
Government spokesmen have also tried to suggest that the economic situation in other countries during those two years might be the cause of our difficulties. Again, this does not hold because most countries in Europe have been expanding fairly rapidly during those years. In france and Italy there has been considerable growth, although it is true that Britain has been experiencing some difficulties in its economy. In 1965 British imports increased by one per cent, yet our economy expanded only by 2½ per cent in that year. In 1961 British imports fell by one per cent but this did not prevent us from achieving a growth of 5 per cent in our economy. If in 1961 we expanded our economy by that amount despite a fall in British imports, there can be no excuse for our failure to expand our economy in 1965.
The reason for our difficulties does not lie in outside difficulties but in the mismanagement of our economy during the years 1964, 1965 and 1966. There are three primary causes to be considered. First of all, the excessive size of the ninth round. Blame for this goes back to the Government's mishandling of the eighth round when they pushed up the increases given by the ESB thus leading to the excessive 12 per cent increase, which was copied in the ninth round.
Secondly, the inflation of credit, for which the Government was responsible in recent years has been a primary cause of our difficulties. This is something which should have been avoided. During the year 1955 there was an excessive inflation of credit but there was no wage round until the end of that year. That inflation can thus be clearly seen to have been caused by the expansion in credit. Despite the lesson learned in that year no steps were taken in 1964 and no direction was given by the Central Bank that any steps should be taken in regard to the excessive inflation in credit. In the 1959-61 period we made satisfactory progress because among other things our credit policy was kept under control. In those years our national output rose by about 5 per cent per annum and our credit expanded by slightly in excess of that, 6½ per cent to 7 per cent.
In 1962-63 the brakes were relaxed at a time when the rate of expansion of our economy fell back to three and a half per cent and the credit growth percentage increased to 10 per cent per annum. The credit inflation reached its peak in 1964. In 1964, when the economy grew by 4 per cent, credit was expanded by 14 per cent. This gap between credit growth and the expansion of the economy is something which should be avoided. The Central Bank should have had regard to the whole question of credit under these inflationary conditions. What was done was that the regulator proposed in "Economic Development" was dropped and nothing was put in its place, so we drifted through 1964 with no guidance to the banks as to the credit they should extend. No guidance was given until May, 1965. The failure of the Government and the Central Bank in this area is one of the major weaknesses of Irish administration in recent years.
The third cause of our difficulties is again completely within the control of the Government. The growth of public expenditure in these years had got completely out of control. In a period of two years, between 1962-63 and 1964-65, the volume of tax revenue at national level increased by one-third, from £173 million to £229 million. In the same years our capital programme was expanded by 50 per cent, from £66 million to £98 million. This was in a period when our national output grew by eight per cent.
Any government which thinks it can expand public expenditure, current and capital together, in a way which is totally disproportionate to the growth of the economy and get away with it, is a government not capable of administering the affairs of the country effectively. The result is the situation before us today. The inflation thus created by Government action and inaction forced a deflationary policy in 1965 which has led to a general reaction from which our economy has since suffered.
The deflation which arose out of the administration of the Government's policies in 1964-65 meant a loss of buoyancy in revenue which has tended to level off as the economy was thus pushed into a state of stagnation. This in turn resulted in a Budget deficit as current expenditure was not controlled within the limits of the declining growth in our economy. This Budget deficit increased the amount the Government had to borrow. The capital programme proved even more inflexible. The Government failed to any significant extent to cut the capital budget for 1965-66 and, as well, the amount they had to borrow was increased by virtue of the fact that current expenditure could not be cut thus leading to a budget deficit. The Government, therefore, increased their borrowing sharply, at a time when they were telling the Central Bank to cut back total availability of credit. The effect on the private sector of the consequent sharp cut in credit resulted in a sharp cut in expansion.
This provoked private individuals who had lent money to the Department of Finance by way of Exchequer Bills to take it back. The Government was then forced to borrow further money from the banks and so a vicious circle was set up which brought us close to a very really serious financial crisis. We got out of these difficulties by virtue of measures which brought the economy of this country to a standstill. The Government were forced to take so much of the available credit and to take credit on such a scale that it brought the economy of the country to a halt. This was far beyond the needs of the economic situation.
After 1964 there was a slowing-down, a kind of slowing-down which was necessary. Limited measures would have been adequate to tackle the economic situation but the Government caught in the grip of its own maladministration was forced to call a halt to the progress as set out by the Government in its own Second Programme. Instead of the 3¾ per cent growth which the Government foresaw, projected and promised in its review of the Programme in March last, we are now in the situation, according to the Central Bank, for example, where there is no growth in the economy at all.
These Government policies were forced on them through difficulties of there own creation. The Department of Finance told us in March last in its Progress Report that what was necessary was to cut the external deficit to £28 million, and the growth of the economy to 3¾ per cent this year—yet what has happened has been a deflation so sharp that economic growth has almost come to a stop and the external deficit was cut to below £15 million by last June. The economy has been deflated rapidly and sharply in order to get the Government out of the difficulties they had created for themselves. If that is not maladministration I do not know what is. By stopping the growth of the economy so that we are now running 18 months to two years behind the level of activity set out in the Second Programme by the Government. They have managed to avoid a really serious financial situation. Because of the situation they were in there was possibly nothing else they could do, but this has been most unfortunate for the economy of this country.
Who is to blame for this? There is an unfortunate tendency for Government Ministers to go round speaking privately about these problems and suggesting that the blame does not lie on them but rather on the advice they get from their civil servants. This is a disreputable performance and is one which no government should condone. In the years up to 1964 the Government took credit for the expansion of the economy. The Government is not entitled to have it both ways. They must take the blame as well as the credit for the results of their decisions. Whether they took advice or rejected advice, we do not know which, that may have been good or bad. The Government's attitude seems to be "nobody told us that our policies were going to lead to a crisis". I doubt very much if this is the case. I doubt very much if responsible advisers of the Government failed to warn them as to the effects of excessive Government expenditure. Certainly the Central Bank never failed to warn of the effects of excessive expanditure during all those years but the Government in the lack of wisdom rejected advice along those lines and proceeded with an inflation, the disastrous consequences of which now lie before us. I think we should reject any alibis of this kind. If the Government Minister's are not be able to make up their own minds on advice given to them, if they have not necessary qualities to decide these matters for themselves they should not be in Government. If they accept the responsibility of office they must accept responsibility for decisions and for evaluating advice given to them and deciding whether to take it or not. They should make their decisions and then accept the blame or the credit.
What we see before us today is a failure of planning. In the First Programme things went to a good deal better. This was perhaps partly because the First Programme was relatively simple and straightforward and within the grasp of Government Ministers copying with it. As it was within their grasp they were able to work it reasonably successfully. When the Second Programme was devised it was different. It set out specific targets and a framework for expansion. It was a programme which if worked properly, would have led to a continual successful growth of our economy. But this programme required a different kind of Government from the kind required by the First Programme. It required a Government which understood what was involved in planning and understood the discipline of planning and accepted this discipline. If we had that kind of Government we should have got through this period without the present difficulties. If the Government had insisted on having presented to them at all times a clear picture of where they stood in relation to each of the specific targets of the Programme and had insisted on not deviating from the targets then we could have avoided the difficulties we got into. What happened was that one target was over-fulfilled: the target of public expenditure and public revenue and it is the excessive level of public expenditure that has put our economy out of gear in this period.
I think it must be said in retrospect, and I think it is a fair criticism, that the planners, those responsible for this programme, failed to appreciate the dangers of presenting the Government with a programme of this kind and the difficulty the Government would have in understanding the discipline of the programme and accepting it. There was a rather naive assumption that this programme was one which would be understood and worked by the Government and that if deviations began to occur in one area that the correct conclusions would be drawn and corrective action taken. In retrospect it is clear that this kind of detailed planning was premature as regards the degree of political sophistication and the development of political institutions in this country. The present Government was not able to work a system of this kind.
However, our problems now is not to mull over these past difficulties except in so far as they afford lessons for the future for this Government and for future Governments. This Government have failed to learn from their own past mistakes. How can we get out of these difficulties and how can we ensure against their recurrence? There is a serious danger in the present situation. I have suggested that we are running one and a half years or two years behind the Second Programme targets. By 1970 we shall still be behind. That is the probability at the present time. To assume the contrary for the next three years is not realistic. I am far from convinced that this Government understand what this means and that they are prepared and are setting about cutting their cloth according to this measures. There is no evidence of a comprehension on the part of the Government of the extend to which the shortfall in our targets which now lies before us will necessitate a cut back in the Government's vague ideas of expanding public expenditure indefinitely. It is important that the full implications of the present difficulties for the Second Programme should be appreciated and accepted by the Government. Otherwise we are liable to get a continuation of the excessively rapid expansion of public expenditure in the years ahead which will reprecipitate these difficulties in a year or two.
In reviewing what we have to do in the situation, first of all I should like to say that the situation at the economic level is not as serious now as it may seem. We have got over, by drastic measures which have done serious temporary damage to the economy, the financial crisis. Our economy is basically sound. It has a potential for growth despite the Government's maladministration. The danger generally is not serious although the ground lost will not be rapidly retrieved and most of it will not be retrieved at all. We shall not readily catch up but, that having being said, the situation of the Irish economy is that the financial crisis is now behind us. The economy is basically sound although it is now running behind where it should be. This is a situation which should give concern to anybody who looked forward to the expansion of public services and community services in the years ahead, and who recognises that this kind of mistake, once made, is readily made again unless people realise the type of error that has been made. The economy itself is basically sound and a natural healing process will take place unless it is interfered with by future Government errors.
However, the immediate situation we are faced with is one in which the economy has been overdeflated beyond the needs of the economic situation as a result of the financial exigencies of the Government. What we have to try to do is to get the economy moving again as rapidly as circumstances permit. Here we face a difficulty in that external circumstances can affect us as they did not affect us in 1965. It is true that in trying to get the economy in moving again we face external difficulties to which we must have regard. The British situation is not one that would encourage a Government to reflate shortly even if the internal situation permitted it. One can therefore understand a certain temporary in action on the Government's part. But the need for some reflation has been clear since last May as I think I have said previously elsewhere and there has been an inordinate delay in taking action about it for reasons which are however understandable — viz., because of the bank strike which led for a period to the total absence of many financial data on which to base Government policy. The after-effects of the bank strike were much greater than expected. Even in mid-November is still left the Government in some doubt as to the true financial situation and left them in some difficulty about determining a policy. Thus, the reflation of our economy was put on one side for four months longer than was necessary simply because the Government and the Central Bank had not accurate information because of the bank strike. This was an unlooked-for and to some degree and unexpected consequence of the bank strike which itself did relatively little damage to the economy but to the extent that it has prevented the Government from re-formulating their economic policies as rapidly as they would otherwise have been able to do, it has held up our recovery. We now have a decision by the Central Bank that in the 12 months ahead credit can be expanded by 11 per cent. This is a fairly substantial figure, compared with the 6 per cent, which was the last target for credit expansion, given, I think, last March. This should have a significant reflectionary effect and it is encouraging that the Central Bank feels that the internal and external situation permits such a degree of credit expansion at the present time, because the Central Bank is known to be cautious in policies of credit expansion. This 11 per cent should certainly help to get the economy moving again.
When that happens, and when the economy is expanding again, we shall still face the after-effects of this crisis, however. I should like to evaluate these a little more precisely because I am personally quite unhappy, as I said a few minutes ago, as to whether the Government realise just what their mis-management of the economy will do to the Second Programme targets. If this is not appreciated, we could get, very readily, into difficulties again.
As far as can be judged, we are likely, by 1970, to be running something like 7½ per cent behind our targets. Perhaps that is the little on the high side; perhaps I am being overpessimistic; perhaps the economy may expand unusually rapidly in 1968 and 1969, and perhaps we could catch up, so that by 1970 the short-fall might be only 5 per cent, but we would be most unwise to count on that at this time.
These figures like 5 per cent and 7½ per cent may seem small but let us consider what 7½ per cent of national output in 1970 means. It means, in terms of current money values, £100 million. We are likely to produce in this country in 1970, at current prices, approximately £100 million less than was proposed in the Second Programme, and we shall have approximately £100 million less resources to distribute, to use for the benefit of the people of this country.
Moreover, owing to the fact that the Second Programme itself was defective in its investment target, this will have a quite disproportionate effect on living standards in this country in 1970. This does not appear to have been appreciated by the Government and certainly not by the trade unions or by the people at large.
The Second Programme made quite inadequate provision for investment and, already the level of investment in this country is well ahead of the level forecast. It needs to be ahead if we are to achieve the rate of growth we need. Consequently, out of this smaller, much smaller—smaller perhaps by £100 million—output we shall have to allocate a bigger amount for investment than had been proposed in the Second Programme. Consumption —the other way of spending our resources—will have to be squeezed between these two princers and it looks as though we shall find our living standards in 1970, 10 per cent lower than the figure proposed in the Second Programme. I can only say that if I were in Government at present time I would not count on having available for personal consumption in 1970 an amount more than 90 per cent of that provided in the Second Programme although when the times comes it could be perhaps up to 92 per cent. We shall be short 10 per cent on our living standards in that year.
What effect will this situation have on public expenditure? The Government, in the Second Programme, proposed to increase the burden of taxation in this country from 23.7 per cent to 26.2 per cent during the period of the Second Programme, a proposal which it must be said was accepted by all Parties, although nobody likes taxation, because of a general recognition of the desirability of improving community services. As far as I can calculate—and I should be very interested indeed to hear a correction from the Minister if he feels my figure is incorrect—the burden of taxation this year, four years before the end of the Second Programme, will be about 26.7 per cent. In other words, already, after only three years of the seven years, the burden of taxation has been pushed up well above the level projected at the end of the seven years period. We have been increasing the share of resources taken by the Government and other public authorities, three times as fast as was projected in the Second Programme, so completely out of hand has public expenditure got under the present Government, and so completely have they disregarded the discipline of the Programme which they themselves put forward and endorsed not much more than two years ago.
If one assumes, for the moment, that the Government succeeded in stabilising the burden of taxation at the present level, which is already higher than the target, and that 26.7 per cent was taken of the national output we are likely to have in 1970, this means that the amount of money available from taxation in that year would be something like £50 million short of the target figure the Government were planning for in the Second Programme. If they take a higher share, because of the likely short fall of output in that year—because we have lost up to two years' progress through the recent mismanagement of our affairs— the Government are likely to have £50 million less to spend, in current money values, in 1970 than they had planned for. One would like to know that the Government recognise this difficulty or, if they do not recognise it, what is their estimate of the situation. Perhaps my figures are wrong; I have not got access to the sources of information the Government have; perhaps the Minister would like to put forward his view of how the Second Programme targets will evolve? I am open to correction, if I have erred in these calculations; the Minister and his advisers are in a position to correct me. But, subject to correction, it seems to me that the resources available from taxation will be something like £50 million short of the target level in 1970 and that this is something which Government policy-making must take account of in the years ahead. If on the other hand the Government, once again, pursues a policy of expanding the burden of taxation at the kind of rate of expansion we have had in those heedless years of 1964 to 1966, than it will be a very short time indeed before we are back in the same kind of crisis precipitated by the maladministration of the Government in those years.
We require now a complete review of the Second Programme. We have been told this is being undertaken. One would like to feel it will be produced soon and that when it is produced the Government will understand and accept the discipline of the revised Programme, as they totally failed to understand and accept the discipline of the original programme put to them. There is no good whatever in producing a review of the programme for public edification of the Government themselves do not sit down, understand what it means and devise policies which fit within the limit of the resources which they themselves will be saying are likely to be available.
This review will need to take account not only of the loss of progress but also of several other factors which have become evident in the course of the last couple of years. Thus, there are grounds for believing that the employment targets of the Second Programme were erroneously assessed. In the absence of an adequate demographic analysis of our future population and employment trends, figures for employment targets were put forward, based on the estimates of emigration. A re-work of these employment targets is necessary because, it seems to me, the Government, through not examining properly the targets put to them in 1964, committed themselves to an expansion of employment which was, in fact, physically impossible on the basis of the estimates made as regards emigration for the period of the Second Programme. They committed themselves to an increase in employment which could not be achieved because, if the number of people that it was said would emigrate, did in fact emigrate there would not be enough people left to take up these jobs. It was a mistake on the part of the Government to talk about 80,000 new jobs being available by 1970 when the people simply would not be there. The failure of the Government to examine the figures put to them, and the failure of the Government— despite frequent representations from me, at any rate, and from others also— to establish any proper system of demographic analysis and forecasting have left them in the position of having promised an increase of employment which is physically impossible because people will not be there for these jobs at the level suggested for emigration in the Second Programme target.
We need therefore—and the Government should apply their minds to this to free themselves from possible Opposition taunts—to seek a revision of this employment target on a more realistic basis. They must establish somewhere in the public service a demographic forecasting unit capable of giving more accurate guidance than that given by the employment target in the Second Programme with its extraordinary crudities and inadequacies. We require a revision of the employment target and the Government in their own interest should see to this.
Secondly we want a revision of the inadequate investment requirements as proposed in the Second Programme. Here the deficiency is very substantial. It is difficult to understand how the Government could have accepted a proposition that this country would not need to invest any higher proportion of its national output in 1970 than in 1963. It was evident at the time— and this is not hindsight on my part— that the proposition that 18½ per cent of our national output should be invested during the period of the Second Programme was absurd and was out of line with the experience of other countries and with recent trends immediately before that time. This figure needs to be revised to a more realistic figure. As the years go by we will need to invest an increasing proportion of our national output to achieve the rate of growth we need to achieve.
Thirdly in revising the Programme account will have to be taken of the fact that it was prepared on the assumption that the Government would need to devote no higher proportion of national output to transfer payment purposes and particularly for social welfare purposes during the period of the Programme. One of the extraordinary features of the Second Programme is the fact that it contained no provision for an increase in the proportion of national output available for transfer payments. By some slight margin the target figure for 1970 is actually a slightly lower proportion of the national output than at the beginning of the Second Programme period. How such a proposition could have been put forward and how the Government could have been foolish enough to accept it, knowing all the pressures they would face to increase the proportion of our resources devoted to this purpose, is incomprehensible. That was one of the first criticisms I made of the programme.
The fact is that the Government have found it necessary to ignore that target. So far as I can calculate it in the current year the money devoted to these transfer payments is about 15 to 17 per cent greater than it ought to be if the Government were adhering to the target in the Programme in this respect. I do not blame the Government for moving this figure up and for ignoring this target, but when one decides to ignore one target one has to accept the corollary that one has to reduce something else. That is something which the Government have not shown a predisposition to accept. However, the idea that the transfer payments devoted to social welfare should not be increased is something which the Government have instinctively rejected. Therefore, this target needs to be drastically revised to a more realistic figure.
Fourthly, one of the other weaknesses of the Programme which was not clear at the time—and I suspect it was not clear to the Government—was that it made no provision for the status increases in the Civil Services. It is evident from an examination of the detailed figures in the Programme that it was based on the assumption that the price of the services provided by the public services would not rise any faster than prices generally, on other words, that salaries in the public service would rise in the line with salaries elsewhere, and that the cost of the public service would not rise more rapidly than the cost of other services. Anyone who examines the figures will find that this emerges clearly from them. The fact remains that the Government subsequently found themselves faced with the status claims to which they agreed. They are in the dilemma that these status claims were either unjust and should not have been agreed to, or that they were largely justifiable, which is my own view. If they were largely justifiable provision should have been made for them. What is quite intolerable is to draw up a Programme which makes no provision for a claim which is then said to be justified. If these status increases were found to be justifiable in retrospect there is no excuse for failure to make provision for them, provision which is substantial and which involves another £10 million of our resources—another £10 million to be taken away from something else.
These are some of the principal changes required in a review of the targets in the Programme. The Government will than be faced with several choices. I will put forward two of these choices. First they are going to be faced with either having to accept a totally inadequate level of investment which cannot possibly give us the growth rate in our economy which we require, or with having to halve the planned growth rate of living standards projected in the Programme. During the next four years if the Government are not prepared to put that proposition to the people they will be faced with inadequate investment, a slower growth of the economy and a situation in which living standards will ultimately grow just as slowly.
We have the right to ask the Government what they propose to do. Does the Minister accept the fact that we are not going to have available to us in 1970 the resources proposed in the Second Programme, or does he still persist in the delution that the enormous losses in recent years can be made up and that in 1970 we will have achieved the targets set out in the Programme? If he accepts, as I think he must, that the targets will not be attained, will be allocate sufficient resources to investment at the expense of the consumer or will he allow the volume of investment to be inadequate for our needs. He must have some policy. I should not say that. He ought to have some policy, and the country has a right to know what it is and what the Government's plans are for the allocation of the reduced resources which will be available in 1970—reduced by comparison with the targets originally proposed for the allocation of these resources.
The Second dilemma as I see it is that he will either have to accept an increase in the tax burden in the years ahead continuing at three times the planned rate, or he will be short £50 million of the money provided in the Second Programme for public purposes, or he must make some compromise between the two. Perhaps the answer will be that he will accept a compromise involving some cutting down in the services which the Government intended to provide, and an increase in the burden of taxation less than three times the projected increase in the burden of taxation. What is his policy? Is it to go on increasing the burden of taxation at three times the planned rate, or is it to cut back on that and to have a more normal, acceptable and reasonable increase in the taxation burden, accepting that as a result of this he will not have available anything like the reserves he planned to have in 1970 for financing the public services?
He is faced with a dilemma. The job of an opposition in these circumstances is to insist that the Minister faces that dilemma and that he answers these questions and does not go on dithering, avoiding the realities of the situation and dodging the issue. We have a right to press for an answer and to insist that he should tell us his policy on taxation.