Michael Noonan
Question:4 Mr. Noonan asked the Minister for Finance his views on whether the increase in inflation of 4.3% in the 12 months to February 2000 is a mat ter for concern; and if he will make a statement on the matter. [9372/00]
Ceisteanna – Questions. Priority Questions. - Price Inflation.
As I have stated previously, the recent increase in the rate of inflation reflects a number of factors, which include the fall in the value of the euro; the increase in crude oil prices, which have added more than 1% to inflation; the budget increase in excise duty on tobacco, which was introduced for health reasons and which has added about 0.75% to inflation; and domestic demand pressures.
As the Deputy is aware, changes in the value of the exchange rate and movements in international oil prices are outside our control. It is expected that inflation will peak in the near future and begin to fall in the second half of the year. The Government's main concern is to ensure that this once-off increase in inflation will not lead to unsustainable wage developments which could damage our economic prospects. Adherence to the pay terms of the Programme for Prosperity and Fairness is essential in this context.
Enhancing competition is also important in keeping inflation low. Greater competition has put downward pressure on prices in certain sectors. The fall in telecommunications costs is one example. The Government is continuing to pursue these market-based reforms.
Is the Minister aware of the difficulties low paid workers have in accepting that a 5.5% annual wage increase is sufficient compensation for an inflation rate of almost 4.5%? He did very little in his budget to take low paid workers out of the tax net and the increase of 5.5% will be fully subject to 22% tax.
I am sure the Deputy read a recent statistical commentary which showed the rate of tax and social insurance contributions paid by those earning £10,000 and upwards is much lower than that paid in our neighbouring country, the United Kingdom. The Deputy will also be aware that in the period preceding partnership in 1987, we continually awarded ourselves high nominal wage increases, which followed high inflation and led to higher tax increases. That led to a circle of high unemployment and put our public finances in a critical position. Since 1987, we have adopted the other approach of awarding ourselves low nominal wage increases, combined with tax reductions. Everybody's standard of living has increased dramatically, particularly between 1994 and 1999. Everybody's standard of living will increase further over the lifetime of the new Programme for Prosperity and Fairness, with the terms of the pay increases and the tax reductions. That is the reason the trade union movement voted so overwhelmingly for the recent PPF agreement.
Does the Minister agree that his casual and nonchalant attitude to the highest inflation rates in the European Union is undermining the partnership agreement which he lauds? Does he realise that a more rigorous attitude to the dangers of inflation would help combat industrial relations problems, which we know from the situation on the streets of Dublin today is getting out of hand? We know that what is coming down the pipeline is set to undermine the new PPF at a very early stage.
The Deputy is aware that most economic commentators and analysts agree with my supposition regarding inflation. The main determinants of inflation have been exchange rate led. The increased cost of oil has also led to increased inflation. At least half the inflation figure relates to those two areas and to the tobacco increases I announced in the December budget. The other factors are attributable locally. However, most analysts agree with me and it is proved by any analysis of the figures.
I reject any assertions that the Minister for Finance or the Government could do anything which would have any dampening effect on the level of inflation. Taking a reasonable view of what will happen over the next year, particularly in regard to the oil market, we expect inflation to peak a little higher and then return to better and lower levels.
It is quite clear the Government has influence over inflation – almost 1% of the 4.3% increase was due to decisions announced by the Minister on budget day. Does the Minister agree that the price of an ordinary three bedroom semi-detached house has doubled since the Government came into office? Does he not realise the pressure that is exerting on the wage front for young couples, particularly young public servants? Will he do anything about that? Or will he say, as he just has, that the Government has no influence over these matters and will continue to stand idly by, as a Fianna Fáil Government did on another famous occasion?
As the Deputy is aware, the Government has undertaken a number of initiatives in the housing area. In regard to taxation, I introduced the Finance (No. 2) Bill, 1998, on foot of the Bacon report in order to dampen down house price inflation.
The price of houses has doubled.
In the interim, a number of measures have been taken by my colleague, the Minister for the Environment and Local Government, to increase supply.
Total failure.
It is an inevitable fact that when demand for any product is greater than supply, the price will increase. We are endeavouring to increase supply in all our programmes. That will continue to be the Government's aim. I will gladly listen to suggestions about any additional tax measures I should take. However, as the Deputy is aware from our recent debates on the Finance Bill, I have introduced further taxation initiatives to encourage people to free up supply. One million people were employed in 1987 and almost 1.7 million people are employed now. The growth in the Irish economy has been phenomenal. Instead of emigration, we now have net immigration.
We must proceed to the next question.
Until supply and demand are in synchronisation, the price of houses will continue to rise. However, I hope we will be able to introduce—
I call Question No. 5.