The purpose of this year's Appropriation Bill, as in each year, is to give statutory effect to the departmental Estimates for the Supply Services, both non-capital and capital, including Supplementary Estimates that were necessary throughout the year. This year's Bill follows the usual format. It appropriates to the various services set out in the Schedule the sum of £6,151 million comprising the Estimates totalling £6,052 million, as set out in the revised post-budget Book of Estimates, together with Supplementary Estimates of £99 million, which were approved by the Dáil during the year. The Bill also authorises the use of certain departmental receipts as Appropriations-in-aid.
Looking back on 1985, I believe that we can draw satisfaction from the performance of the economy. Inflation this year has fallen to its lowest level since 1968. It is now at a level one quarter of the average rate of over 20 per cent prevailing in 1981. Apart from the benefits which accrue to the individual citizen from lower inflation, it is also of particular importance in enhancing the competitiveness of the productive sector of the economy vis-a-vis our main trading partners.
A reduction in inflation has another central importance in that the reduction in inflation of itself gives rise to a reduction in inflationary expectations. That will induce people, firms and all of those engaged in our economy to act in a way which reinforces the reduction in inflation. Looking at a number of developments in the economy over the last few months, we have begun to see the beneficial effect of a reduction in inflationary expectations.
Impressive progress was made on the external front during the past year, even though international economic trends were less favourable than in 1984. From a situation in the earlier years of this decade when we faced a clearly unsustainable trade deficit of over £1,800 million, or some 15 per cent of GNP, we have now reached the point where a sizeable trade surplus for the year is emerging. Not since the forties have we managed to record a favourable trade balance. This, together with the strong performance of tourism, is showing through in the balance of payments. The first half current account deficit of £398 million was almost £170 million better than in the same period of 1984. Although the balance of payments will improve again this year for the fourth successive year, the persistence of a deficit in the balance of payments is a direct consequence of our excessive reliance on foreign borrowing to underpin unsustainable levels of public spending.
It is also gratifying to be able to report a turnaround in domestic demand. For the first time since 1981, both consumer spending and fixed investment are showing an increase in real terms. The recovery in personal expenditure, while it reflects the benefit to individuals and households from the fiscal measures in the 1985 budget and the substantial decline in mortgage interest rates in the course of the year, has clearly been underpinned by the reduction in inflation. Therein lies an important lesson for us all: improved living standards are possible in the context of moderation in nominal incomes.
The progress on the employment front during the year fell short of our expectations. Yet even here recent indicators provide some grounds for optimism in expecting an improvement in the overall employment situation. Aided by the success of many of the Government's job creation initiatives, such as the enterprise allowance and social employment schemes, the annual rate of increase in unemployment at the end of last month had fallen to the lowest point for over five years. I am confident that this more favourable trend will be consolidated by the stimulatory impact of the employment and taxation measures which the Government announced during last October.
Looking ahead to the new year, I believe we can anticipate further improvement in the level of economic activity. Forecasts for the international economy indicate that potential will exist for maintaining the impressive export performance of the past four years, thereby further improving our balance of payments position. This will, of course, depend on the adoption of a sensible approach to income determination. If this is forthcoming, and I believe the outturn this year should help to ensure it, then we can also look forward to a further winding-down of the underlying rate of inflation next year. Against this background, the labour market outlook is more favourable than for some years past.
Turning to the record of the Government in managing public spending programmes, Senators will be glad to learn that in 1985, for the fourth consecutive year, total expenditure on supply services will be in line with the budget target for the year. The Government have restored credibility to the budget process. We have taken firm and positive action to put the public finances in order and have created the conditions in which soundly based decisions on economic policy and public expenditure can be taken. Our present policies ensure the proper mix of expenditure, investment, taxation and borrowing. Our primary objective must now be to consolidate on the progress already made by pressing ahead towards achievement of the targets in Building on Reality for reducing our dependence on borrowing, thereby contributing to a reduction of the burden currently being imposed on our public finances and the balance of payments by our present debt overhang.
The Estimates for Public Expenditure for 1986 and the public capital programme published earlier this week show that steady progress continues to be made in correcting imbalances in the public finances. They are however only the first step of the 1986 budgetary process. The measures that will be outlined in my Budget Statement next month, taken together with the Estimates, will ensure the maintenance of the growth which has been a feature of the economy in the past year.
I should like to deal briefly with the main features of the Estimates and the public capital programme. The 1986 Estimates for non-capital supply services, at £5,698 million, are very close to the plan target of £5,630 million. Several factors account for the variation, chief of which is the fact that the 1986 pay and pensions bill at current rates of pay amounts to £2,600 million which is £75 million over the plan target of £2,525 million.
In a number of individual areas, there are substantial variations from the 1986 plan provisions. These variations, however, reflect specific decisions taken by Government. For example, the Justice area increase reflects in part increased expenditure arising from the Stardust Tribunal while the provision for food subsidies is £30 million more than the national plan figure reflecting a halving in the subsidies from April 1986 rather than their full abolition in January.
The public capital programme, published this week, provides for expenditure of £1,706 million on public sector capital investment in 1986. Of that amount, £1,237 million will affect the building and construction industry, an increase of 5 per cent on the 1985 provisional outturn.
The allocation for sectoral economic investment is 11 per cent up on the 1985 outturn reflecting the expected better climate for investment next year and the Government's determination to give the maximum possible support to investment and employment in the directly productive sectors of the economy.
The allocation for productive infrastructure is down on the 1985 outturn but this reflects the planned tailing-off of major investment programmes undertaken in recent years by ESB and BTE. Where work in the infrastructural area remains to be done, the Government have made the necessary increased allocations. Bord Gáis will spend an extra £31 million compared with 1985, constructing pipelines to Limerick and Waterford with associated spur lines to industries and coops; the allocations for roads at £130 million is at a level which will facilitate the continuation and completion of existing works and the initiation of a number of major new schemes, including the Newbridge by-pass and the Bray-Shankill by-pass to mention just two.
Social infrastructure investment will increase by £25 million on the 1985 outturn. The bulk of the increase over 1985 is in the housing area. While local authority housing expenditure is being reduced, reflecting the success of the £5,000 grant scheme for local authority tenants-tenant purchasers giving up their homes and moving to the private sector, an estimated 9,000 houses will still be provided next year, either through building or vacancies. An additional £26 million is being allocated for private housing grants reflecting in the main the expanded house improvement grant scheme and the full year effect of the increased new house grants for first time purchasers announced in the 1985 budget.
The switch in emphasis from direct expenditure on output towards grant-aid expenditure, which has a high level of associated private investment, should be of particular benefit to the construction industry. Indeed, the Government commitment to maximising public sector input into the construction industry within the public finance constraint is well demonstrated in the 1986 PCP with 72.5 per cent of public capital expenditure likely to affect the industry, a significant rise over the 69.3 per cent recorded for this year.
The Government will continue to commit themselves to improving the efficiency and effectiveness of public investment. The process was started in 1983 with the issuing of detailed guidelines to all Departments aimed at:
(i) improving decision-making, by improving the quality of the information on which decisions are based through the use of systematic appraisal techniques and;
(ii) improving management control once projects were initiated.
Considerable progress has been made on this score and there is evidence that a more cost conscious approach to the planning and implementation of public investment is being adopted.
Two other developments in 1985 indicate that the Government are determined to get better value for money from public investment. They are:
(i) consultants' fees are now calculated on the VAT-exclusive cost of projects and discussions are underway with the professional institutes on arrangements for effective price competition on fees and on splitting of fees, and
(ii) new contracts procedures are being finalised at present in my Department. Under these procedures, public authorities are being encouraged to use fixed price contracts wherever possible and to ensure that every aspect of a design is completed before going to tender. The new procedures will largely eliminate the scope for later changes and the consequent incidence of extra costs.
I commend the Appropriation Bill to the House.