3 October 2000
Speech by Minister for Finance, Mr Charlie McCreevy, TD, to Dáil Eireann
Private Members Motion on Inflation
I should say at the outset that I welcome the opportunity to debate these issues. This Government has a proud record of economic achievement. Moreover, we have a coherent strategy to address the economic and social problems that as a nation we now face.
As I have stated on a number of occasions, the Government is concerned about price pressures in the economy and the current rate of inflation. Maintaining stability and Social Partnership in order to sustain economic and social progress are our key challenges. These are key issues for government to address. But they are issues that concern us all and require a response from all sections of society.
Core elements in the Government’s response include fostering competition and tackling supply problems. But most importantly the Government is working to ensure that the successful Social Partnership model remains on track.
Consensus was crucial in tackling our unemployment and fiscal crises in the past and I believe that it is also crucial in tackling our current problems. Inflation cannot be successfully addressed outside the Partnership framework and the parameters of the current agreement.
Before I turn to the specifics of the motion before the House, I want to put our current problems in context. These problems cannot be separated from the economic and social progress that we are continuing to make. It may be populist to focus only on the negative and ignore the positive as the proposers of this motion do. But we should not forget that we are experiencing the fastest and most sustained period of economic growth in our country’s history.
When this Government came into office in 1997 we made promises to the people of Ireland. Our primary aim was and still is to ensure that the fruits of economic prosperity are prudently availed of to foster opportunities for employment and enterprise. I have always believed that success in these areas would provide us with the revenue that we need to fulfil our ambitious targets to establish an inclusive society to provide for the needs of our elderly citizens, people with disabilities, the unemployed , our children and all in our society who are vulnerable.
The third quarter Exchequer figures published by my Department earlier today indicate that the economy is strong and getting stronger, in a fundamental way. This is no undeserved and fleeting boom. Instead, the economy and our national finances are undergoing a sustained structural change, with the result that we can ensure our own and succeeding generations' prosperity.
A strong economy, sound finances and strong, effective social services go together. This has always been the philosophy of Fianna Fail, and the correctness of our vision is borne out in the state of the economy today.
When we came into office sustaining economic growth was one of our key objectives. Let’s look at the record. The economy grew by:
9.3 % in 1997
7.8 % in 1998
7.8 % in 1999
And growth of 8.3 % is projected for this year.
Growth has averaged over 8 per cent in the last three years. This is even more remarkable given the performance of our main trading partners. The EU has experienced growth of just 2.5 per cent per annum during this period.
This is one of the longest and most sustained periods of growth experienced by any industrialised economy. We should not lose sight of this.
Moreover, we have a coherent and solid set of policies geared towards maintaining this success. The National Development Plan, the Programme for Prosperity and Fairness and our tax policies are addressing "the problems of success" we have in housing, infrastructure and the labour market. Their successful implementation will provide the basis for sustainable growth and social progress.
We will also continue with our sensible budgetary policies. We will continue to run a budget surplus and further reduce the national debt. Since we came into office we have moved from a deficit of 0.6 % of GDP to a projected surplus of 3.7 % this year. We have also managed to reduce the national debt from 66 % of GDP to a projected 44 % while setting aside considerable sums to pay for our future pension liabilities.
I have no doubt that spending these surpluses on larger tax cuts and more expenditure increases would be a popular course of action. Indeed this course of action is often suggested by the Opposition parties in this House. But this Government does not believe in short-termism for popularity’s sake. Future generations deserve better. We will not be reckless with the public finances.
Of course, it is inconsistent to simultaneously stand up and criticise a lack of spending in particular areas while blaming this Government for the high rate of inflation. Let’s have a bit of honesty. If it is alleged that "loose" budgetary policy is responsible for our high rate of inflation, I hope the Opposition will outline in this debate the taxes they want increased and the public services they want reduced.
The motion before the House is also critical of this Government’s social policies. I would like to put the record straight. When we came into Office we gave a commitment to reduce unemployment. In 1997 unemployment stood at almost 10 %. It now stands at 4.3 %.
Even more spectacular is the fall in the rate of long term unemployment. The numbers in long term unemployment have fallen by almost 70 per cent in the last 4 years. There are now 27,000 persons classified as long-term unemployed compared to 86,000 when the last Government left office.
Of course, more needs to be done and this Government is committed to ensuring that unemployment keeps on falling. We believe that employment opportunities should be accessible to all and we continue to strive for further success in this regard.
Employment grew by nearly 100,000 last year and by over 200,000 since we took office. This is an incredible performance. There can be no doubt that those who now have jobs have benefited from our management of the economy.
Improvements in Living Standards
Of course, real living standards have also increased across the board. For the record, real manufacturing earnings before tax reductions are up over 7 % since 1997. This is an increase of 2 % per annum.
Taking account of reductions in taxation real average incomes for a single person are up over 15 % since we took office. This is an average increase of almost 5 % per annum.
The take home pay of a married one income couple with two children is up over 19 %, an average increase of nearly 6 % per annum.
This Government received a mandate from the electorate to reduce personal taxes and this is what we have done.
- In Budget 1998 tax reductions amounted to £517 million
- In Budget 1999 they totalled £581 million
- And in Budget 2000, we managed to reduce taxes by £942 million
These significant tax packages have enabled us to meet many of the tax commitments set out in the Government Programme.
- the standard rate of tax has been reduced by 4 percentage points
- the top rate is also down by 4 percentage points
We have also increased personal allowances and the standard band while introducing tax credits and starting the first phase of individualisation. These policies have removed thousands from the tax net. They have also taken thousands more off the top rate of tax. Our innovative tax policies are rewarding work and effort.
It is clear that living standards have improved significantly. I accept that increases in inflation will erode some of the expected gains this year. Despite what the motion before the House suggests however, real earnings will increase this year.
Looking ahead I am confident that inflation should begin to fall. This is also the view of the ESRI, the Central bank and most forecasters. Accordingly, the terms of the Programme for Prosperity and Fairness will support significant growth in real living standards over the Programme period.
Social Welfare Increases
Those on social welfare have also seen real increases during our term in office
1.The personal rate on most social welfare payments has increased by £10 per week or 15% since 1997 while the personal rate for social welfare old age pensions have increased by £18 per week over the same period - an increase of 23% in the Old Age (Contributory) Pension or 27% in the Old Age (Non-Contributory) Pension. This is well ahead of inflation.
In addition to the basic rate increases outlined above, I have introduced a number of other initiatives which have had a very real and positive impact on the position of welfare-dependant households.
I announced in my last Budget that I would be increasing the Qualified Adult Allowance (QAA) from its then level of roughly 60% of the personal rate to 70% over a three year period. The first instalment of this increase was included in Budget 2000 with a minimum increase in the QAA of £3.80 per week, an increase of almost 9% for most recipients.
Another very significant innovation for social welfare recipients was the introduction of the earlier effective date of payment for social welfare increases. And further improvements are envisaged. From 2002 all social welfare recipients can look forward to receiving the increases announced in each Budget with effect from January, in line with the recently announced decision to align the tax and calendar years.
In addition to all of the above, there have been numerous other improvements and initiatives including reform of the capital assessment procedure for the purpose of the social welfare means test, the extension of the social welfare free schemes to all people over the age of 75 years, the introduction of a respite care grant for carers and many others which are designed to meet the particular needs of many of the most vulnerable groups in society.
These measures will help to reduce the incidence of poverty. The latest figures produced in the context of the National Anti-Poverty Strategy show that the number of people experiencing consistent poverty has fallen very substantially from 9% - 15% in 1994 to 6% - 8% by 1998. Given the falls in unemployment since, the incidence of consistent poverty is now undoubtedly lower still.
While this reduction is a very welcome development, the Government is committed to making further progress. We have set ourselves ambitious new targets to further reduce consistent poverty to below 5% by 2004. This will require addressing issues across the five key areas of income adequacy, unemployment, educational disadvantage and urban and rural poverty.
I regret that higher-than-expected inflation this year has reduced the impact of the Social Welfare increases announced in Budget 2000. This has affected those on fixed incomes. However we are committed to ensuring that there will be real increases in all social welfare rates while making progress towards a rate of £100 per week for all social welfare benefits and ensuring continued substantial improvements in the rate of Child Benefit.
I am confident that when we leave office the record will show that we made enormous progress in reducing poverty and improving the living standards of those on fixed incomes.
Current Position on Inflation
I would now like to say a few words about the current inflation situation and the Government’s response.
As the House is aware the latest inflation figures released by the CSO show that headline inflation in Ireland remained at 6.2 % in August. This is clearly much higher than the Government expected at the time of last year’s Budget.
I should also add that it is much higher than anybody else was forecasting at the time.
The ESRI, the Central Bank, the European Commission and the OECD were all forecasting inflation of around 3 % - the Government’s forecast on Budget-day.
This is not intended to deflect attention from the perspective outturn for this year: our inflation performance is disappointing and represents a serious challenge. However it should be noted that many of the factors pushing up our inflation rate were unexpected.
As Deputies are aware, these factors include the weakness of the euro, the upward trend in oil prices, increases in mortgage interest rates and higher inflation in the services sector.
The Budget increase in excise duty on tobacco products also added to headline inflation. This was introduced as a health promotion measure, and which was welcomed by this House at the time in spite of its impact on inflation.
The Motion before the House expresses alarm at the impact of higher oil prices on the economy.
We are all aware of the impact of high international oil prices. Oil prices alone are responsible for 1.2 % of our inflation rate. The cost of crude oil has gone from less that $10 per barrel in March 1999 to the current level in excess of $30 dollars per barrel. It was inevitable that this tripling of prices would add to inflation, as it has done across all EU countries.
Needless to say, Finance Ministers do not determine the price of oil on international markets. Of course, if Deputies Noonan and McDowell wish to spend the next few months touring OPEC capitals pressing the case for lower oil prices we will provide whatever assistance is required.
However I must point out that none of the increase in energy prices is due to tax increases. Excise duties on unleaded petrol and diesel remain unchanged in my three Budgets to date. As the House is aware Ireland has some of the lowest fuel prices in Europe.
Falls in the value of the euro and higher ECB interest rates have also added to inflation. The Euro is now down over 20 % since its launch. These falls have been unexpected and are clearly adding to inflation.
Clearly a lot of our inflation is outside of our control. This is not to be complacent but to state the reality. In Economic and Monetary Union we no longer have control over interest and exchange rates. Changing circumstances will impact upon our economy and we have to deal with these as best we can. This is the reality of the new environment we find ourselves.
While these external factors are crucial domestic inflation is also increasing. Services inflation is up almost 7 % in the year to August. This reflects, to a large extent, the tightness in the labour market. Alcohol prices are also increasing. These rose by 5 % according to the latest figures. Housing and childcare costs are also increasing.
Measures to combat inflation
This Government has acknowledged that the inflation challenge is a pressing one at present. We must always avoid any policies that would push inflation up to unsustainable levels. At the same time, we must be mindful of the problems facing people and businesses behind all the macroeconomics statistics.
We have to be careful, equally, not to withdraw from our electoral and partnership commitments on tax and wages due to a misreading of the economic signals.
In tackling inflation, the Government is taking account of the role of every aspect of economic policy, from tax to competition, from price rules and the labour market. It is clear that the best defence against inflation is an even more open and flexible economy, where artificial barriers are minimised.
There will always be challenges in sustaining a strong economy and sound finances. These challenges and difficulties should not blind us to the tremendous opportunity we now have.
This is the context in which I will be framing December's budget, the fourth of five of this transforming Government. It is the context in which we are addressing the issues of the day such as inflation, transport, childcare, tax policy, health and education services.
We will keep to our ambition that 80 per cent of taxpayers should pay tax on the standard rate only. With support from the social partners, we are introducing a single standard rate income tax band for all individual taxpayers. This is the type of transformation in people's financial situation and the tax system that the Government is making on the basis of our strong economy.
In June we announced a package of measures which focused on increasing competition in the domestic economy. These included:
bringing into force immediately the provisions of the Intoxicating Liquor Act when it was passed by the Dáil in June.
The establishment of a Commission on Licensing to consider the issue of further liberalisation of licensing
The imposition of temporary controls on the price of drink to provide breathing space for other measures to take effect. These are having an impact - for this first time in over two years increases in alcohol prices are below the headline rate.
A freeze on increases in charges or levies by public bodies.
Ministers have also had detailed consultation about price developments and competition with representative bodies for the main sectors of the economy. The Government is reviewing the outcome of these consultations.
Given the Government’s concerns about profiteering, the Office of the Director of Consumer Affairs has been given addition resources to start a vigorous programme of price monitoring and publicity. This will highlight prices and encourage greater price sensitivity by consumers and stimulate competition.
As regards the cost of housing, I have stated on a number of occasions that developments remain a major economic and social problem. The increases in the cost of housing are unacceptable.
As the House is aware this Government has a number of key objectives in this area. These focus on the need to:
maximise housing output to meet the continuing strong demand,
stop short-term speculation,
help first-time buyers enter the market,
increase the supply of social and affordable housing, and
improve the supply of housing related infrastructure.
A new set of measures were announced last June. These included:
an exemption on stamp duty for first-time buyers for second-hand houses up to £150,000;
a higher stamp duty rate of 9 % for all housing transactions for non-owner occupiers;
introduction for three years of an anti-speculative tax of 2 % per annum on investors purchasing residential properties for non-owner occupation;
the use of Strategic Development Zones to ensure the early development of large-scale residential developments,
measures to drive key infrastructural projects, together with targeted investment in key water, sewerage and non-national roads infrastructure;
measures to increase the capacity of the construction industry, in particular to address shortages of professional and skilled workers;
additional 1,000 local authority housing units per annum from 2000 to 2006; and
improvements to the Shared Ownership and Affordable Housing Schemes.
It is too early to gauge the impact of these measures. However, previous measures introduced to increase housing supply are having an impact. Over 46,000 new houses were completed in 1999 - the highest number in the history of the State. House completions to the end of June are 5 % higher than for the same period in 1999. This means that over 130,000 new homes have been completed since this Government took office, and this figure will exceed 150,000 by the end of the year - more than had been completed in the rest of the 1990’s.
Childcare costs have also increased significantly in recent years. I have introduced measures to improve the supply and affordability of childcare places in Budgets 1999 and 2000.
These measures included
Capital allowances on the construction, refurbishment or extension of premises to be used for childcare purposes; and
the exemption from tax of any benefit-in-kind arising from the provision of free or subsidised childcare by employers for their employees.
A major package of initiatives to increase the supply of childcare places was introduced in Budget 2000 which cost £46 million.
We are also committed to the provision of £250 million in the Equal Opportunities Childcare Programme of the National Development Plan.
Allied to this expenditure, on 27 June, 2000 the Government announced the provision of a further £40 million for childcare within an anti-inflationary package.
Most importantly, however, the Government is making every effort to sustain the Partnership approach which kept inflation low. We are considering what further measures to take in the context of the forthcoming budget while consulting closely with the Social Partners. I am confident that notwithstanding the unwelcome increase in inflation , we can ensure that the PPF will deliver real improvements in living standards while ensuring we maintain our competitiveness.
On gain sharing the Government is very supportive of plans to reward employees in ways which will not damage our competitiveness. As the House is aware the Programme for Prosperity and Fairness supports the idea of gain-sharing. The Agreement states, "the Government and the social partners acknowledge the role of Employees Share Option Trusts (ESOTs), gainsharing, profit sharing and other financial employee incentives in developing and deepening partnership and in increasing performance and competitiveness."
A Consultative Committee involving ICTU, IBEC and appropriate Government Departments and Agencies, will be established to prepare proposal for consideration in the context of Budget 2001. The Consultative Committee has been established and has met 5 times to date. Gainsharing is one of the areas the Committee has been considering. The whole area of employee financial participation is a complex one and I await the conclusions of this committee with interest.
The new economic environment places particular demands on pay determination in the public sector. As regards the implementation of the public service element of the pay agreement good progress has been made to date. The Public Service Benchmarking Body has been established well ahead of the schedule envisaged in the agreement. In addition, the Public Service Monitoring Group, which will act as a forum for discussions of overarching public service pay issues under the Programme, has also been established and begun meeting. The Public Service Modernisation commitments in the Programme are also being progressed.
In conclusion this Government has a proud record of achievement. We set ourselves ambitious targets and we have delivered -
We promised to reduce unemployment. Unemployment has fallen from almost 10 % to close to 4 %.
We promised to deliver real tax reform. In the last three Budget we have introduced the largest tax packages ever.
We promised to reduce the national debt. The national debt has fallen from 66 % of GDP to 42%.
We promised to improve living standards - average household incomes has risen substantially since 1997.
We promised to reduce poverty. The numbers in poverty have fallen consistently.
In the National development Plan we have begun the most ambitious programme of investment in the history of the state.
We also have a coherent strategies for the new challenges we now face.
We have introduced a package of measures to tackle inflation.
In tandem with the Social Partners and in the context of the forthcoming budget we are addressing the current rate of inflation and sustaining Social Partnership.
This Government is committed to improving the provision of childcare and reducing the pressures in the housing market.
We are taking action to relieve pressures in the housing market. The package of measures introduced in June will improve the supply of affordable housing, curb speculative demand and help first-time buyers gain a foothold on the property ladder.
To sum up - we have increased standards of living, reduced unemployment, reduced taxation and improved the public finances.
We deliver what we promise - and will continue to do so in the future.
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