These children will eventually have to repay that debt. That is our bequest to them along with the burdens already loaded on them in 20 years of political cowardice in the management of the finances of this nation. The budget is built on very shakey foundations.
It assumes that the Government will collect about £8.3 billion, or £400 million extra, in taxes in 1991 because the economy will grow by 2.25 per cent. It also assumes, even more incredibly, that people will increase their spending on consumer goods by about 3.25 per cent. Yet a number of independent economists say the economy will only grow not by 2.25 per cent but a mere 1 per cent in 1991. If that happens, the Government will not get in the taxes they are counting on, and the budget and its arithmetic will collapse.
The budget also assumes that we will have an average level of unemployment next year of 228,000. On that basis we will need to spend £3 billion on social welfare in 1991 — that is over a quarter of all Government spending.
Well, if the economists are right, and the economy only grows at 1 per cent there will be more than 228,000 people unemployed in 1991. Furthermore, if the British economy slumps, and more people return home from the building industry in Britain as many predict or as some say is already happening, the level of unemployment will grow even further. The really big unknown in this budget is emigration. The Minister is banking on emigration continuing. That hope underlies his entire budgetary arithmetic. He hopes that emigration will relieve him of finding unemployment benefit or unemployment assistance. If emigration stops or if unemployed emigrants return, the figure will go completely astray. It is a budget founded on the continuance of emigration.
The Government estimate that they will have to spend £2 billion on interest payments next year — almost two-thirds as much as they are spending on social welfare. What happens if interest rates go up? The Government's £2 billion bill will go up accordingly. This week we saw the most unusual spectacle of the German Finance Minister, Theo Waigel, being told by the European Community that he is borrowing too much and that if he continues to do so he runs the risk that he will push up DM interest rates and thereby push everybody else's interest rates as well. What happens if the German Finance Minister does not take the advice being proferred to him by President Jacques Delors and the European Commission? Then our interest rates will go up too and the Minister will have to revise upwards the £2 billion figure which he has set aside to meet interest payments.
To sum up, this year the Minister estimates that, on the one hand, he will collect about £8.5 billion in taxes. Against that he will spend £9 billion, but the £8.5 billion could be a serious overestimate because of slower growth and higher unemployment. Likewise, the £9 billion on spending could be an underestimate: £2 billion of it — interest payments — could go up because of higher interest rates; £3 billion of it — social welfare — could go up because of higher unemployment and less emigration. The gap could start widening quite quickly on both sides of the equation.
There are a number of phoney elements even in the budget figures presented to us. One-off savings on tax collections of £15 million are included as if they were recurrent revenue. We are asked to believe that six different Departments in the past three weeks made so called "estimating" mistakes in their original 1991 Estimates published a few months ago, and that now they can suddenly "save" an extra £23 million through correcting estimating mistakes. At the very best, all this is just a deferral of expenditure.
The concessions announced in the budget will also cost a lot more in a full year than appears in the Minister's arithmetic. I estimate that the tax and social welfare concessions will cost almost £80 million more in a full year than is shown in the Minister's 1991 arithmetic. These sorts of miscalculations do not matter very much if the wind is at your back and the international economy is buoyant, but they can be seriously aggravated if things begin to go wrong.
The effect of the Gulf War on the international economy is incalculable. The Minister warned us earlier this month of the prospective costs of EC tax harmonisation. He told us that the amount we are collecting from deposit interest retention tax, which currently brings in £300 million, would have to change drastically. They were the Minister's words. That was not reflected in any provision in the budget. He admitted that our VAT and excise duties would have to move much closer to those in Britain. In a Europe without frontier posts, wide divergencies in purchase taxes are literally impossible and unenforceable. The NESC calculate that the maximum divergence we could afford between our rates of excise duty and VAT and those applying in Britain is 3 per cent. It could cost us £300 million to reduce our purchase taxes to levels that would be sustainable in a barrier-free Europe. The budget ignores this problem.
The simple fact is that in a barrier-free Europe, neither taxes on income, taxes on spending nor taxes on capital can be kept at a higher level than taxes in other competing areas within the barrier-free European union. This is particularly the case for poorer peripheral regions.
Even without penal taxes, the Irish Central Bank, in a 1988 study, estimated that money and resources will naturally tend to flow, in a monetary union, from the poorer peripheral regions like Ireland towards richer central areas like Germany and Southern Britain. So, if there is an added handicap of higher taxes in the peripheral region, the outflow of resources from Ireland to the central parts of the Community will be all the greater. The budget makes no real provision to deal with that.
There is another threat on the horizon — the dismantlement of the CAP and the introduction of what I would describe as an "Indian reservation" style of agricultural policy advocated by Commissioner MacSharry. The farmers are to be paid to stay down on the farm so long as they produce nothing. That is quite literally creating an Indian reservation where people will live in enforced idleness in rural Ireland. I have the gravest fears about what that will do to the spirit of our people, yet that is being proposed by Commissioner Ray MacSharry in the name of reform of the CAP.
The budget takes no account of the effect of Commissioner MacSharry's policies on the budget arithmetic or the Government's tax revenue. Commissioner MacSharry's policies are specifically designed to destroy intensive commercial, grass-based livestock production in Ireland, yet this is the core of Ireland's agricultural economy. The commissioner would meanwhile shift the advantage in agricultural competition in Europe away from grass-based production to grain-based livestock production systems of the type which are particularly competitive in continental Europe and uncompetitive here because of our climatic conditions. He is shifting the advantage towards the Continent and away from Ireland. Irish farmers are to be bought off with acreage-based payments designed to discourage intensive production. Commissioner MacSharry's proposals may be beneficial for some farmers but they will be disastrous for the Irish economy and disastrous for all those who make their living by selling things to commercial farmers who are in serious production or buying things from those farmers. The entire economy which has been built around commerical agriculture, mostly employing people in the PAYE sector, will be destroyed by Commissioner MacSharry's proposals. It will damage the tax base and reduce PAYE revenue but the Government have taken no account of the need to provide replacement revenue.
These policy changes in the CAP will have a disproportionate effect on the Irish economy. The IMF did a study some time ago to find out which European Community countries would suffer a net loss from the lower agricultural and food prices that would be caused by the dismantlement of the CAP. This study showed that Ireland and Denmark would be the losers. We are alone with the Danes at the negotiating table in Brussels defending the CAP. The threat is very great of a loss in income to this country through the dismantlement of the CAP. That threat is entirely ignored in this budget. All the other countries, including Ireland and Denmark would be unaffected once the consumer benefits of lower food prices were set against the agricultural losses of lower farm incomes, but there would be major revenue losses to the Irish Exchequer and to employment in the Irish food industry if the Common Agricultural Policy is undermined either by internal reforms or by concessions to the United States on export refunds for Irish products going to third countries.
I would like to draw the attention of the House to the fact that Commissioner Leon Brittan and the European Community Ambassador in the United States recently said, in the United States where presumably they have a favourable audience, that the European Commission is prepared to put a ceiling on export refunds. That is a major climb down on the European Community's negotiating position and is the first indication of a collapse in the Community's negotiating position in defence of the Common Agriculutral Policy in these world trade talks. There has been no protest from the Irish Government against that statement by Commissioner Britten, no protest at all from either Commissioner MacSharry or Minister O'Kennedy about that matter. So we must assume that Commissioner Brittan and the EC ambassador were speaking with the approval of the Irish Government and the approval of the European Commission in making that very serious statement so far as Irish agriculture is concerned. This budget ignores that danger entirely.
To sum up the Minister's budgetary targets may be said to be vulnerable on five fronts. First, there is the likelihood that there will be slower economic growth at home — that is in fact stated in the budget arithmetic. Second, there is the strong possibility that there will be higher unemployment at home because of reduced emigration and lower economic growth. Third, there is the possibility of higher internationl interest rates. Fourth, there are the costs, for which the Minister has not made any provision, of EC tax harmonisation. Fifth, there are substantial revenue losses on the horizon because of the dismantling of Ireland's major industry because of the Common Agricultural Policy being dismantled.
The Government have made no attempt whatever to quantify, let alone prepare for, these five potential threats. They have committed themselves to substantial increases in public expenditure under the Programme for Economic and Social Progress. They have stated that "resources will have to be reallocated" to meet the cost of these commitments. They give no clue at all, however, where this money might be found to pay for this extra expenditure. The Government have actually committed themselves to increases in public spending covering three-quarters of the entire area of Government spending. The Government have admitted in clear language that there will be cuts, so presumably such cuts will have to be made in the remaining one-quarter of public spending that the Government are not committed to increasing.
The House is entitled to know where the Government intend to make these cuts. They have said they will make cuts. They have asked the social partners and this House to approve this budget on the basis of the proposed expenditure increases over the next few years, but they have told us nothing about the cuts. They are asking this House and the social partners essentially to buy a pig in a poke, to agree to something when they are only being told about the good features of the vehicle but not that there are many defects in the engine, that the vehicle is unlikely to start when the attempt is made to do so. I do not think it is particularly good to ask the Irish people to buy the used car that is presented by this Government with its lack of commitment to consumer information.
The Government have no clear fiscal target. All they have stated is that "the aim of fiscal policy will continue to be to reduce the national debt/GNP ratio towards 100 per cent by 1993". Think about that for a minute. What does it mean? Does it mean anything at all, a Cheann Comhairle?
All the Government are saying is that they must reduce the ratio towards 100 per cent by 1993. They do not say when they will actually reach 100 per cent, if ever. The word "towards" is put in there so that they will have an escape route at any time. Nor does the Minister say, anywhere in yesterday's budget, what he expects the ratio to be at the end of 1991, or by the end of 1992. We will not know whether he is progressing according to plan at any time between now and 1993.
In any event, the debt/GNP ratio is like a mirage. It is the relationship between the two figures either of which can vary up or down at any time. One never knows how close one is to one's target until one has actually passed it. A more unsuitable target for coherent planning would be hard to imagine.
In any human endeavour there is no point in setting oneself a target unless one can tell, at any given time, how far one is away from it. The target of debt/GNP ratio does not meet the test of being a useful target for management because we do not know, and the Government do not know, how far away we are from it at any given time, nor do the Government propose to indicate any milestones along the way to the target towards which they are moving.
As far as the public finances are concerned, therefore, it can truthfully be said that the Government have no definite or clear target at all. I wonder if the social partners, for whom the soundness of the national finances is obviously a matter of vital interest, have ever really studied the shaky financial foundations on which their concordat with the Government is based.
Let me turn to the content of the budget itself. It is clear that tax reform has been abandoned; indeed, reform of any kind has been abandoned. The Fianna Fáil minority Government, without the Progressive Democrats, actually had more of a commitment to tax reform than the present Fianna Fáil/Progressive Democrat Coalition. This shows that the Progressive Democrats are burned out as a force for reform. Indeed, their presence in the Government this time is entirely negative. They continue to hang around to haunt Fianna Fáil with memories of past feuds that should be long forgotten, thereby frightening their Fianna Fáil colleagues at the Cabinet table so much that Fianna Fáil are afraid to make any decision that could prove even slightly unpopular, but the Progressive Democrats are unable, themselves, to do anything about their own much vaunted reform programme. This Government, consisting of two parts, is a classic case of mutual paralysis. The Progressive Democrats have paralysed Fianna Fáil and Fianna Fáil have paralysed the Progressive Democrats, and nobody is doing anything about the problems of the country. Quite literally, the Government is a disgrace.
The Progressive Democrats cannot keep their promises even in the areas in which they had ministerial office. After a year and a half, the Minister for Industry and Commerce has not yet produced a competition Bill which his own party was able to draft and present to this Dáil three years ago. He has now been in office as Minister for Industry and Commerce for a year and a half and has not been able to produce a Bill with all the assistance of the officials in the Department of Industry and Commerce that his own party in Opposition were able to produce three years ago. He is clearly not up to his job. As a result of this failure the Minister for Finance had to say this year in regard to the reduction in VAT and the lack of competition in our economy that last year "some businesses were shown not to have reduced prices following the VAT cut in the 1990 budget". Between the two of them, the Minister for Finance and the Minister for Industry and Commerce have had a whole year to come up with an answer to the problem. Now all they say is that they "will be working closely together to ensure that the customer gets full benefit this time". Is there anyone in this House who believes that, or believes them? Frankly, I do not believe them.
Without a competition Act, which the Minister for Industry and Commerce, Deputy O'Malley, has negligently failed to produce, the Government simply do not have the legal means to ensure that the benefits of any VAT reduction are actually passed on to the consumer. The VAT reductions will not be passed on to the consumer, but the VAT increases will most certainly be passed on because there is no competition in this economy and there is a Minister who has failed and failed again to produce the necessary legislation to create competition in this economy.
It is significant also that the only area in which real, as distinct from "estimating", cuts were made in spending in the past three weeks was in the job-creating bodies, which are the specific responsibility of the Minister for Industry and Commerce. In SFADCo there was a cut of £1 million; the IDA had a cut of £1.3 million; science and technology had a cut of £1.65 million; and NADCORP had a cut of £1.5 million. These are all job creating agencies which are the responsibility of the Minister for Industry and Commerce. I wonder was he away on the day the Estimates were discussed at Cabinet? In my view if the Progressive Democrats devoted as much energy to job creation, to tax reform and to minding their own ministries as they did to so enthusiastically removing Deputy Lenihan from the Government, they might have more to show for the past year and a half.
For a country that needs to develop employment, our present tax policy for foreign investment is perverse. We should have a tax policy that would encourage foreign companies to locate labour or brain-intensive parts of their worldwide business here in Ireland. In fact we have a tax policy that is quite the reverse of that. Fine Gael question the wisdom of the Fianna Fáil promise to continue with a maximum of a 10 per cent corporate tax rate up to the year 2010. If we want foreign firms to create really permanent jobs here in Ireland, we must get them to set up their research and marketing operations here. It is only if that part of their business is in Ireland that any of the jobs here will be really secure. But a 10 per cent tax, a low corporate tax policy, which Fianna Fáil want to continue up to the year 2010, actually encourages multi-national companies to keep research and development and marketing operations out of Ireland at all costs. This is because marketing and research cost money, and things that cost money are expenses which may be set off against tax. In order to minimise tax you locate operations that cost money where you can get the maximum set off against the maximum rate of corporate tax. So the lower the tax rate, and our industrial policy is based on having a low tax rate and virtually nothing else of interest to industrialists, the less value you get from a tax deduction. As a result companies will not locate their R & D or marketing operations or things that cost money in this country but will locate them somewhere else in their worldwide network of locations. They will locate in Ireland high profit, low cost and low skill elements of their operation — in other words precisely the type of operation that we do not want is being attracted here and the type of operations that we want is being dissuaded from coming here. That is the essence of our industrial policy at present, presided over by the Minister for Industry and Commerce and the Minister for Finance in an economy in which 228,000 people are unemployed. It is a perverse and bad industrial policy, which should be changed.
There has been some quite ill-informed criticism of the provisions of the Programme for Economic and Social Progress as far as public service pay is concerned. The Government postponed certain pay increases due in 1987, 1988 and 1989 until 1991 and 1992. At the time they made these postponements the Government were congratulated by most of the academic economists for having done so. Now these same economists and critics are complaining that the money has to be found in 1991. I do not make that criticism. The money is due and should be paid.
However, there is one thing I do question. I question why the Government failed, in the course of the recent negotiations to get agreement that public service conciliation and arbitration schemes be amended for the future so as to require arbitrators to formally take account of the state of the national finances in deciding pay awards. Arbitrators at present, and this is why we have a problem with special pay increases, are required to ignore the state of the nation's finances in making their awards. That is why the awards are so generous. They are required by the terms of their conciliation and arbitration scheme to ignore — and being good lawyers they always follow their terms of reference — the state of the nation's finances and concentrate solely on pay relativities. That is why we constantly have not only basic increases in pay but also an ever-enlarging pile of special pay increases on top of them.
Having a conciliation and arbitration scheme that formally ignores the state of the nation's finances at any given time is ridiculous. It should be changed. Fianna Fáil had an opportunity during the negotiations on the recent programme to attempt by agreement — I emphasise — to have this changed. Fianna Fáil failed to raise this matter in the past few months and they failed to negotiate a change in this unrealistic aspect of public service pay determination in Ireland: a classic action of a Government that can look no further ahead than six months. It might have cost them some money this year and they were not interested in it as they have no sense of the long term interest of this country.
The tax provisions of the budget are deceptive. Rates of tax have, of course, been reduced but tax bands and tax allowances remain virtually unchanged. Some people will find that as a result of pay increases the top slice of their income will be moving into the 48p band from the 30p band and they will thus lose more by this than they will gain from the slight reduction in the 30p band. This will not happen to everybody but the people who will suffer in this context are those whose incomes are at or just below the average industrial wage — the classic case of the people in the PAYE sector. A person at or below the industrial wage will find that his income from work is too high to benefit from the increases that the budget offers in exemption limits while being too low to benefit from the cuts in the top tax rate, that the Minister has also made in this budget. A workers on the average industrial wage or just below it gains nothing at all from this budget, in fact he will suffer quite considerably from it. He is further adversely affected by the fact that the Government failed to adjust the PRSI and PAYE allowances in line with inflation. The worker in the middle to lower income groups and in the PAYE sector is suffering under this budget in order that those at higher levels and elsewhere in the economy can gain.
Much has been made by Government spokesmen of the increases that have been granted in the family income supplement and in the exemption limits for those on lower incomes. It has been suggested that these measures are designed to ease the burden on low income families with children. I believe the use of exemption limits and the use of the family income supplement is not the best way to help those people. In fact, the use of exemption limits and the family income supplement actually creates new poverty traps in the tax and social welfare code for people at or below the average industrial wage. These people find that if they do some overtime and go over the income tax exemption limit they suddenly lose their family income supplement. When they go above the income tax exemption limit they face a very steep increase in the rate of tax.