by Gary Murphy
The first Inter-Party Government’s economic policy was outlined by John A. Costello in a speech to the Institute of Bankers in Ireland. Written by Lynch and Fitzgerald, it argued that only by large-scale investment could the national wealth of the country be increased. Costello’s address was unique in that it was the first time in the history of the state that the head of Government had devoted a major speech exclusively to the principles underlying his Government’s economic policy. Lynch believed that Costello’s Government had an unrivalled opportunity to install Keynesian principles firmly at the heart of Irish economic-policy formulation.4 What ultimately distinguished the Inter-Party Government from Fianna Fáil, according to Lynch, was ‘a belief that capital investment by the state based on the theories of John Maynard Keynes could best solve the basic Irish economic problem of providing jobs for the thousands who were unemployed or who emigrated’.5McGilligan outlined the Government’s policy in a letter to Joseph Brennan, of the Central Bank:
It is the intention of the Government to draw a more strict line of demarcation than that hitherto followed between capital and non-capital services. The need for this arises from the greatly expanded programme of capital development which we have in hand. Our intentions were announced as long as last November when the Taoiseach made a pronouncement on the subject at the annual dinner of the Institute of Bankers.6
Keynesianism under fire
The main opposition to this shift to Keynesianism came from Finance. Most of its senior officials, led by McElligott, vehemently opposed Costello’s speech and the Government’s economic stance. McGilligan, however, was an impressive proponent of a moderate Keynesianism adapted to Irish circumstances, and had actively approved of Costello’s speech. The first Finance minister who could match McElligott intellectually and a formidable exponent of whatever viewpoint he chose to represent, McGilligan could not be brought into line by traditional Finance thinking.7With McGilligan driving this new shift in Government thinking, bureaucratic opposition to his policy came from the Central Bank. In its 1949–50 annual report, the bank implicitly criticised the inflationary potential of Government policy and expressed serious concerns regarding the monetary consequences of the ‘extensive programme of capital works on which the state is engaged’.8
The 1950–51 annual report contained a scathing attack by Joseph Brennan on the whole thrust of Government policy, causing political uproar. Published in October after the Costello Government had lost office – and after Marshall Aid had come to an end and the Government was faced with an acute balance-of-payments crisis – it incensed incumbent ministers, among them Lemass, and ex-ministers, particularly McGilligan and MacBride. The report expressed grave misgivings about the financial state of the nation, uncertainties that were shared by the majority of senior officials in Finance. It claimed the nation was living beyond its means, and criticised increased Government expenditure, especially on public works and subsidies. It urged fiscal measures to curb inflation, balance the budget and restrict improvident spending. It called for restraint in wage policy and restriction of bank credit.9The report starkly illustrated the deep conflict of opinion between those who sincerely believed that Ireland could be stirred out of economic stagnation only by massive public investment – for which adequate resources could be found solely by borrowing – and those in the Central Bank and elsewhere who believed with equal sincerity that such a policy would eventually defeat its own purpose.10
Reaction to the report varied. The Irish Press stated that the in-dependent monetary authority had confirmed the warnings of Fianna Fáil ministers, and the paper condemned policies that were particularly associated with the preceding Government.11The Government published a White Paper in 1951 entitled Trend of External Trade and Payments – just before the Central Bank’s report – in an effort to show that the Government and the bank were united in their attempts to enforce conservative economic policies.12Lemass, however, distanced himself from the Central Bank report. In the Dáil, he declared that the report was not a statement of the Government’s views on economic policy. He pointed out that the bank had emphasised the facts of the economic situation and had alerted the public to the fact that there was a problem to be solved. He added that the Government nevertheless intended to follow a policy that was ‘diametrically opposite to that which the Central Bank suggests’.13The Government’s solution, according to Lemass, was to increase production, not cut down consumption. The Dáil and the country would have to choose between two sources of finance – borrowing or additional taxation – to pay for such increased production. To the extent that it could not borrow the money, stated Lemass, the Government thought it worthwhile to get it by increased taxation. Thus, the Central Bank report had been publicly repudiated by the Tanaiste – other than de Valera, the most senior member of the Government.
MacEntee – who later clashed bitterly with Lemass on economic policy – defended the Central Bank’s independent position and its responsibility for the safeguarding of the national currency. As Minister for Finance, MacEntee wholeheartedly endorsed the views of McElligott and Brennan, and pursued a conservative approach, making a mockery of Lemass’ promises in the process.
The response from the opposition was typically scathing. MacBride – an enthusiastic advocate of a large-scale investment policy – criticised Brennan for advising the Government to pursue a policy that opposed national development and that could only result in increased emigration and a lowering of living conditions.14Dillon and McGilligan were equally harsh. Dillon charged that Brennan’s investment policy had been responsible for more than half of the external deficit of 1950, and that ‘if the report was accepted, the wisest thing young people could do would be to fly the country as quickly as possible’.15
Beyond the Dáil, the ITUC rejected the report’s proposals, claiming that they would result in higher unemployment, a cut in consumption, lower real wages, increased taxation, removal or reduction of subsidies, a restriction of the capital-investment programme and a standstill on wages. It asserted that building work being carried out under the public-works programme was of vital importance and should not be singled out as affording considerable scope for retrenchment in the economy, as the report had stated. On the whole, the ITUC declared, deflation would exacerbate the nation’s problems, not solve them.16
A letter from McElligott to McGilligan in February 1951 illustrates the worries the conservative group had regarding the financial situation. In it, McElligott claimed that he had repeatedly drawn attention to the:
… progressive deterioration in our public finances, the rapid growth in public expenditure and in public debt and the inadequate degree of taxation resulting in a series of budget deficits, the growth of which has been camouflaged by deductions for so-called ‘capital’ services, by capitalising subsidies for housing and rural electrification and charging as capital many recurrent items on various votes of a totally unproductive character such as various public works and buildings, harbour grants, airports, employment and emergency schemes, works under the Local Authorities Works Acts and others.17
For McElligott, removing services from the category of capital services was the only way of securing a realistic approach to what was one of the nation’s more intractable problems. That year – 1950 – saw a deficit in the balance of payments for the fourth year in succession, and Finance forecast that it would continue over the following three years unless remedial actions were instituted. The minimum requirement, according to McElligott, was:
… a considerable increase in taxation if the present scale of expansion is to be maintained. There seems no prospect of reducing the latter. Indeed all the indications are for an increase. We have already, in my opinion, allowed the situation to drift too far without taking proper financial measures, but we cannot delay any longer except at great peril to our national economy.18
Brennan and McElligott had by this time become legendary for their adamant refusal to contemplate Government interventio
n in the market, and were staunch believers in a low-taxation, low-spending economy. A month later they were using an OEEC report on the Irish economy, which had made the point that the Irish state was not using enough resources for capital purposes but was instead putting too much money into day to day spending, to implore the Government to change its course of economic action. A memorandum for the Government prepared by McElligott on this report suggests that McGilligan had come around to the thinking of his secretary and that of the governor of the Central Bank:
Too much money is being devoted to consumption and too little is being saved for capital purposes. The corrective measures are rightly stated to be such as would reduce the consumption (primarily of non-essentials) and expand current savings … The Minister for External Affairs does not consider that the present level of consumption reflects an unduly high standard of living. Neither does the Minister for Finance. But like the European Recovery Programme committee, he cannot evade the evidence that as a nation we are at present living beyond our current income, that is our standard of living is higher than we can afford. Of this the heavy external disinvestment for consumption purposes is living proof.19
Thus, McGilligan could not see how consumption could remain at its prevailing level unless there was a great increase in production – which was unlikely – if, at the same time, the Government desired to expand domestic investment by the promotion of savings. Savings, he argued, inevitably entailed abstention from consumption.
While one can only speculate as to whether McGilligan would have gone down the more conservative road if the Inter-Party Government had continued in office, the comment of Noël Browne, Minister for Health in that Government, suggests the affirmative; according to Browne, McGilligan was a traditionalist in matters of finance: ‘Balance the books, pay your way, cut capital expenditure, prime the private enterprise pump and all will be well’.20Although McGilligan could be a formidable advocate of Keynesianism in the Irish context, and was genuinely disposed to a more expansionary financial approach, it does seem that he was willing to revert to a more cautious outlook on financial policy when, early in 1951, McElligott finally persuaded him of the merits of this approach to economic policy. Seán Cromien suggests that McGilligan – in part because of poor health and in part because he was not enamoured of MacBride’s constant interference in matters that were entirely economic – was not entirely happy in Finance, and talks of him avoiding meetings with McElligott in particular, and generally keeping a very low profile.21This supports Browne’s theory that:
[Once] it came to the end of the financial year, and the budget approached, he [McGilligan] appeared to melt into an orgy of inaction and self-pity, skipping Cabinet meetings or arriving late. He clearly dreaded the ‘loaves and fishes’ job of trying to reconcile our many conflicting claims in such a multi-party Government.22
This was one of the kinder comments from the Cabinet-portraits section of Browne’s autobiography, from which McGilligan is one of but two politicians to emerge with any credit.23
There were, indeed, many conflicting claims within this Government, with powerful figures like Dillon and MacBride urging their own views on McGilligan. There is little doubt that McGilligan’s ‘shrewd, critical, questioning approach was hampered by the tensions of the Inter-Party Government’.24Of the ministers in charge of the main spending departments, all had different agendas to that of McGilligan. While in essence it appears that he was not willing to follow an expansionary policy simply for the sake of it, and took the view that it had to pay its way, the demands made upon him from all sides would inevitably put a strain on the Government. Of the important spending ministries in the Government, William Norton, James Everett and T.J. Murphy of the Labour Party were Ministers of Social Welfare, Posts and Telegraphs, and Local Government, respectively; Dan Morrissey – a member of Fine Gael at this stage but formally of Labour – held Industry and Commerce; and James Dillon – not at this stage a formal member of Fine Gael – held Agriculture. As Ronan Fanning points out, none could be accounted party colleagues of McGilligan’s in the fullest sense.25McGilligan was not as radical, and did not go as far as some of his colleagues – most particularly MacBride – would have liked in curbing the extreme caution of his department. Yet his period as minister was the first in which Finance was subjected to a questioning political master who was not afraid to challenge its orthodoxy. In the cautious atmosphere of administrative Ireland, that was an achievement in itself.
‘We shall rely on our own people’
By the time Fianna Fáil regained power in June 1951, Finance had identified the three problems it considered to be at the root of the financial crisis: primarily, the Government was not covering ‘even the current outlay of spending by taxation’; secondly, the inflationary effect of this was accentuated by the fact that capital expenditure by the Government was not being met to any adequate extent from current savings, and was predominantly of an unproductive character; finally, money incomes in the country were being raised ‘not only irrespective of increases in output but even faster in many cases than corresponding increases in Britain, notwithstanding that taxation and living conditions are better here’.26The restoration of Fianna Fáil to Government and the balance-of-payments crisis that accompanied the party’s return gave the mandarins in Finance the opportunity to revert to the virtuous way of economic orthodoxy. Seán MacEntee, back at Finance, was only too willing to help.
MacEntee’s sympathies are aptly demonstrated by the infamous 1952 budget – introduced on 2 April, up to then the earliest in the history of the state. The budget removed subsidies on bread, butter, tea, sugar, alcohol and petrol, and raised income tax by a shilling in the pound. Price increases ranged from 28 per cent for butter to 63 per cent for sugar, and even Maurice Moynihan, official historian of the Central Bank, called it a budget of ‘unusual severity’.27MacEntee justified the budget by pointing to the balance-of-payments situation. In the Dáil, he estimated that in the absence of corrective measures, a deficit of £50 million could be expected in 1952. He argued that:
[There] was no reason to think that the balance of payments will right itself spontaneously. The opening months of this year showed virtually no improvement … and it seems clear that, without an improvement in personal savings and a reduction in inflationary Government finance, the deficit in the balance of payments will remain excessive.28
In the Seanad, he further argued that the possibility of a very severe slump could not be ruled out.29Yet the economy was already in recession when the budget was introduced, and budgetary policy undoubtedly worsened the position. Indeed, current expenditure rose only slightly, while current revenue increased considerably. Furthermore, the balance on the Government’s current account went from a deficit of £4.7 million in 1951 to a surplus of £5.3 million in 1952, while the borrowing requirement fell from £35.5 million in 1951 to £32.2 million in 1952.
Budgetary policy had set out to reduce the current balance-of-payments deficit; in this, it succeeded and by the time of the 1953 budget, the balance-of-payments situation had been rectified. The economy was ready for a period of expansion, but the deflationists in the policy arena were not ready to change direction. There would be no somersault to an expansionary regime. MacEntee ended his budget statement with a note of what Tom Feeney calls ‘almost Churchillian confidence in the Irish people’:
We shall rely on our own people to provide by their industry and thrift the capital necessary to build up the nation. We relied on them before during stringent and terrible days. They did not fail us then and they will not fail us now.30
Reading it more than fifty years after its delivery, it invites comparison with Brian Lenihan’s concluding remarks during his October 2008 budgetary speech:
This Budget serves no vested interest. Rather, it provides an opportunity for us all to pull together and play our part according to our means so that we can secure the gains which have been the achievement of the men and women of this country.
It is, a Cheann Comhairle, no less than a call to patriotic action.31
The 1952 budget is remembered for its removal of subsidies on food. An interdepartmental committee on food subsidies set up in October 1951 concluded that:
[They were] nothing more than a general supplement to incomes provided out of general taxation; they are a costly social service in which, however, the entire community shares without regard to individual income or need. There is no real justification for continuing this policy and in principle it would be desirable to abolish the food subsidies, provided arrangements are made to ensure that the weakest sections of the community do not suffer as a consequence.32
