Vol. 519 No. 5
27 Mr. Noonan asked the Minister for Finance if his attention has been drawn to the statement by the European Economic and Monetary Affairs Commissioner, Mr. Pedro Solbes, that there is overheating in the Irish economy and that the Government should consider steps to bring down the rate of inflation; and if he will make a statement on the matter. [14313/00]
28 Mr. McDowell asked the Minister for Finance if he has had considerations made into the warnings by the trade union movement that unless inflation is brought under control the Programme for Prosperity and Fairness could collapse; the plans if any he has to tackle some of the major cost of living increases, such as the cost of housing and child care, and to bring them under control; and if he will make a statement on the matter. [14276/00]
30 Mr. Noonan asked the Minister for Finance if his attention has been drawn to the fact that the current level of inflation is putting economic prosperity at risk; and the steps he will take to combat rising prices. [14315/00]
31 Mr. Deenihan asked the Minister for Finance his policy on wage claims which seek to gain ground lost by inflation and which go beyond that agreed in the Programme for Prosperity and Fairness; and if he will make a statement on the matter. [14582/00]
I propose to take Questions Nos. 27, 28, 30 and 31 together.
The most recently published inflation figures for Ireland which relate to April show a year-on-year increase of 4.9% in the consumer price index – CPI – and a 5% increase in the harmonised index of consumer prices – HICP. The EU HICP for the same period was 1.7% and it was 1.9% for the 11 countries involved in the euro. As Deputies are aware, this increase is due to a number of factors, including the sharp increase in oil prices, the fall in the value of the euro, the budget increase in excise duty on tobacco and an increase in underlying domestic inflation. The impact of higher energy prices in particular has been significant. Crude oil prices increased from a low of $11 per barrel in March 1999 to a peak in March this year of over $30 per barrel. It is estimated that this has added close to 1.5% to the CPI. The fall in the value of the euro has also added to inflationary pressures. The increase in excise duties for health reasons on tobacco has also added about 0.75% to the CPI and this will pass out of the index by the end of the year.
Thus a large part of the recent increase in inflation reflects exceptional factors. These factors will become less significant over time and, as a consequence, it is expected that inflation will fall in the second half of this year. The extent of this fall will depend on the value of the euro and future oil price developments.
Notwithstanding this uncertainty, it is now clear that inflation will be higher than the 3% average for the year which was forecast on budget day. A revised forecast will be published as usual by my Department in the economic review and outlook in July-August. It is now expected that inflation will average in the order of 4% for the year as a whole, though the rate will be less than this at the end of December. This is higher than was expected when the terms of the Programme for Prosperity and Fairness were being negotiated. However, this agreement is for three years, and I am confident that, over the remaining period of the agreement, inflation will fall well below current levels. In this context, the appropriate policy response is to fully implement the terms of the PPF. I am confident the agreed pay increases combined with promised tax reductions will provide for continued gains in real disposable incomes.
It is the Government's view that unsustainable wage and price developments would threaten our economic prosperity. Our objective is to ensure that the increase in inflation does not become entrenched and that the concerns about overheating, which I share with Commissioner Solbes, are addressed. This means the terms of the PPF must be strictly adhered to. This is the best way of sustaining the economic and social progress we have achieved.
The Minister has informed us that the annual rate of inflation in Ireland is now 5% but that of the European Union is 1.7% on average, which is significantly less than half the Irish rate. However, in his explanation, he attributes our increased rate to the increase in oil prices from $11 to $30 a barrel and the fall in the euro. Is the Minister suggesting ours was the only country in Europe which experienced an increase in oil prices and that it is the only one experiencing a declining euro? Otherwise, his explanation is nonsense because it does not explain the difference between Irish inflation at 5% and European Union average inflation at 1.7%. His explanation applies equally to all European countries.
It is not just I who gives this analysis and explanation of the consumer price index. Independent assessment of the CPI, which is available to people, will prove the points I made. I have not just made this up. This is as a result of analysis of the consumer price index and underlying data. Everyone is agreed that such data show that 1.5% of the rate relates to higher energy prices which have been caused by factors I have just outlined. Another 0.75% relates to the 50p on the packet of cigarettes which I imposed in the budget. There is an indication of inflation in the domestic services area, and analysis of figures will demonstrate the points I have just made. They are not just made up for the purposes of my giving an answer to the House. That is what independent analysis of the figures proves.
I appreciate that they are not made up, but I asked the Minister to explain why the same level of oil price increases across Europe and the same level of decline in the value of euro across the 11 euroland countries has not resulted in similar inflation in other jurisdictions. Their average is 1.7%; our annual rate is 5%. Can the Minister explain that?
I have just explained it. People have analysed these figures and they have been subject to a great deal of analysis. It should also be remembered that, in a small, open economy such as Ireland's, it was agreed before we ever joined the euro that one of the main determinants of Irish inflation was the rate of the Irish pound as against other currencies. Before we joined the euro, it was primarily against sterling, and it has been against sterling and the dollar since we joined it. As of 1 January 1999 when we joined, the euro stood at about 1.16 to 1.17 to the dollar. Last week it was about 88c to 89c to the dollar, which is a considerable decrease in its value. The fall in the exchange rate against sterling has been just as dramatic. We also have the highest ratio of imports of any European countries. Consequently, the exchange rate is a key determinant in Irish inflation, and this was agreed by all long before my time as Minister for Finance.
Does the Minister agree that many workers who signed up to the Programme for Prosperity and Fairness on the basis of a prediction of 3% inflation for this year now feel they have been conned since it is clear they will be less well-off in real terms at the end of the year than they were at the beginning? Will the Minister indicate if he intends to take any measures to reduce the headline rate of inflation between now and the end of the year?
The PPF is an agreement over the best part of three years. Previous agreements which we concluded were for three to four years and were predicated on certain inflation figures. As I said in my reply and in interviews, wage increases together with tax reductions over the lifetime of the agreement will ensure that workers do well. One way inflation would be set off is if people seek compensatory wage increases on account of a temporary blip in inflation. I recall that, during January, February and March of 1998, there were considerable headlines due to the weakness of the Irish pound at that stage as against sterling which it was suggested could set off an inflationary spiral, but that did not occur.
The Programme for Prosperity and Fairness is a cornerstone of recent economic success. It is also a cornerstone in restraining inflation and maintaining our competitiveness. Some trade unionists were against the concept of social part nership and have taken every opportunity in the run-up to the signing of the agreement and since then to denigrate the basis of the agreement. However, I do not subscribe to their views and, as evidenced by the margin of the vote in favour of – 69% to 31% – neither do the vast majority of trade unionists.
Does the Minister appreciate that a 5% headline rate of inflation undermines a wage agreement where the first annual instalment is a 5.5% increase which is subject to income tax? Does he appreciate that the net gain from the increase will be less than the annual inflation figure? In that context, does he have any proposals to bring forward to reduce the headline rate of inflation so that the current wage agreement may be secured?
If we were to make economic decisions based on short-term considerations and make an effort to temporarily reduce headline inflation, that would be the worst possible medicine and most people would agree with me on that. The wage increases under the Programme for Prosperity and Fairness and the proposed tax reductions will give all workers in the State considerable advantages and an increase in their real standard of living in coming years, something previous programmes also did. I am confident the basis on which the programme was constructed and what will happen over the lifetime of the programme will mean everyone will be considerably better-off. It behoves everyone in politics, be they in Government or in Opposition, to encourage people in the trade union movement. People in other areas have said we should take a balanced view of how this will progress. We have seen over the past 12 years the benefits of social consensus and the partnership approach.
Do I take it that the Minister has no proposal to combat inflation? In his initial reply he said that 0.8% of the 5% inflation rate was due to the increase in excise duty on tobacco on budget day. Does he agree that this increase in excise duty on tobacco has nothing to do with the fundamentals of the economy, that it is an arbitrary decision made by the Government, that it is artificial, that it has nothing to do with the fundamentals of economic management and that he would be justified in reducing excise duty elsewhere by a similar amount? I accept it would be tinkering with the headline rate and would be an artificial reduction. However, the increase is artificial and arbitrary in any event and has nothing to do with the fundamentals of the economy. Why not reduce the excise duty on petroleum products by an equivalent percentage? It would place the wage agreement at less risk than it is at present.
The Deputy made a good case, although I doubt if he intended to do so, that the price of tobacco products should not be included in the consumer price index.
The Minister knows my view on that.
We can have a consumer price index which does not include the price of tobacco products or mortgage interest but trade unionists and everyone else want to measure it on the CPI. I am sure the Deputy would agree, as a former Minister for Health, that there are good policy considerations for increasing the price of cigarettes by 50p.
The Minister should answer the question.
The Deputy is right that increasing cigarettes by 20p, 50p or £1 has nothing to do with economic fundamentals. The question relates to the consumer price index as measured and that includes the price of cigarettes.
Why does the Minister not reduce excise duty elsewhere by an equivalent amount?
Will the Minister confirm that it is the Government's policy not to entertain any sectoral wage demands outside the Programme for Prosperity and Fairness during the lifetime of the programme or the Government?
That is correct. The trade union movement signed up to PPF on that basis. As I said on previous occasions when discussing former agreements, this is not a one way process. It is not only the Government which must live up to its terms of the bargain but everyone else must do so as well. The trade union movement signed up to PPF by a percentage of 69% to 31%.
If one sector takes action, will the Government succumb as it has done in the past?
I assure the Deputy it is not the Government's intention to go outside the terms of the PPF for any group. Difficulties have been caused in public sector pay in the past 12 years as a result of dealing with special groups and this has led to knock-on claims in other areas. As the Deputy knows, a benchmarking body will be set up during the lifetime of the agreement. That was the agreed solution between the Government and the trade union movement on how to address problems and relativities in the future. I urgently request all groups with a gripe about any matter to look at what will happen in the benchmarking body. The Government will not step outside the terms of the PPF for any group.
The Minister's apparent complacency in face of the increase in the inflation rate is causing considerable concern. He accepts that his Department's forecast of 3% at budget time was wide of the mark, yet he tells us he does not intend to issue a further official forecast until the mid-summer essay which his Department regularly publishes. On what basis is he asserting that the inflation rate will come down between now and the end of the year?
Ad hoc economic policy is the worst policy of all. If I made immediate responses to every economic change, I would have made crazy decisions over the past three years. The figure we announced at budget time was the Department's best estimate of what inflation would be for 2000 and it was more or less in line with what was said by the ESRI and the Central Bank. As is the custom, we review our economic forecast in July and August of each year and I intend to keep that format.
It is obvious from the inflation figures for the months of January, February, March and April that the average for the year will be 4%, unless something dramatic happens in the second half of the year. However, the figure for year on year at the end of December will be less because tobacco, for example, will fall out of the equation. All this is predicated on what will happen to the price of oil and the value of the euro vis-à-vis other currencies and a guesstimate of what will happen to ECB interest rates. As ECB interest rates increase to cool Europe's economy, it has a knock-on effect here in that it affects mortgage interest rates which are included in the consumer price index. As with tobacco, a case could be made for not including mortgage interest rates in the consumer price index. We will take those things into account in the July and August forecast and we will make our usual estimate at that time.
In a recent edition of The Wall Street Journal the Minister is quoted as suggesting that the European Commission is “a bunch of communists”. Will the Minister clarify whether he said that?
I did not see the article but I did not say that.
What did the Minister say that gave The Wall Street Journal the impression he believes the European Commission is “a bunch of communists”? Does he believe that is a helpful contribution to the debate?
That is another pinko remark.
I have used colourful language throughout my political life but I do not remember, even as a student, referring to people as a bunch of communists. I do not recall using the phrase at any time during my political career or otherwise. I did not see the article but I must get a copy from the Deputy.
The Minister replied to four questions, including Question No. 27, but he did not address the issue in that question. The Commissioner for Economic and Monetary Affairs, Mr. Pedro Solbes, pointed out that our economy is overheating and that the Government should consider steps to reduce the rate of inflation. What steps does the Minister think he had in mind or will he bother to inquire from the other illustrious communist in charge of this portfolio in Europe?
I have not asked Commissioner Solbes what he has in mind but I have a fair idea of what economic commentators, including Commissioner Solbes, have in mind when they talk about taking steps to bring down inflation; they are talking about reducing demand in the economy. There are a few steps one could take to reduce demand in the economy but they are not feasible or practical and they would not have any effect.
In an open economy, such as Germany, France or the United Kingdom, the normal economic textbook applies. However, one would have to take a lot of demand out of our economy to have any effect on inflation. I am talking about a couple of billion, not a couple of million pounds. Do the Deputy and those who advocate taking other steps to reduce inflation want me to telephone the Minister for Health and Children or the Minister for Social, Community and Family Affairs and ask them to give me back £1 billion which we are providing for the health service and social welfare increases, or to say to the trade union movement, with which we recently concluded a deal for the next two years, that I will not give tax reductions but that I will impose tax increases? That is the traditional economic response of policy makers throughout Europe when dealing with economies.
I and others have been at pains over the past two years – many people agree with me – to point out that the rules about inflation do not necessarily apply to our economy because it is small and open. That is why I disagree with outside commentators who apply the normal textbook rules of economic theory to Ireland. An analysis of the past 25 years will show that. The measures I outlined are what would be needed to have any marginal effect on inflation and no one is suggesting we should do that.
I appreciate the Minister did not call Commissioner Solbes or any other Commissioner a communist, but his reply portrays him as a simpleton, which I doubt Mr. Solbes is either.
He is a nice man and we are good friends.
When our inflation rate is three times the European average and Mr. Solbes points out on strong evidence that our economy is overheating and advocates that the Minister should take steps to remediate that, he is not advising him to go down the simplistic route he outlined. The Minister should ask Mr. Solbes what he meant.
I know what Mr. Solbes meant. I will provide the Deputy with copious notes on how the European Commission referred to the Irish situation. The Commission indicated that we should not stimulate demand any further either by means of taxation reductions or expenditure increases. I am a good friend of Mr. Pedro Solbes and I assure the Deputy that this is what he had in mind.
I get the impression that everyone but the Minister is out of step. I put it to him that the main factor contributing to undermining the wage agreement is the inflation in the price of houses. I accept this is not included in the consumer price index but everyone must realise it is proceeding apace. We have already had two Bacon reports, both of which were implemented and failed. Does the Minister propose to take further steps to stabilise the price of houses and to make them affordable to the many young couples, particularly those who live in Dublin who are in absolute despair with regard to their ability to purchase family homes?
The time for this question is almost exhausted. I call on Deputy Deenihan to ask a brief supplementary.
Will the Minister comment on the Bank of Ireland prediction that service inflation could reach 10% before it levels out?
I agree with Deputy Noonan's assertion that the escalating cost of houses is a matter of grave concern. The Government shares his concern about the increase in house prices. When the first Bacon report was received, I introduced the Finance (No. 2) Act, 1998, which temporarily distorted demand. I recall stating at the time that it would have such an effect in the short-term and that we would be obliged to increase supply in the long-term.
Deputy Noonan will be aware that I, in conjunction with the Minister for the Environment and Local Government, have provided a great deal of money serviced land initiatives, major water and sewerage schemes, road access schemes and additional resources for An Bord Pleanála and local authority planning departments to increase supply. He will also be aware that Mr. Bacon will submit a further report on housing to the Minister for the Environment and Local Government in the near future.
The Deputy and I agree there are many reasons for increases in the price of houses and that this is a matter for concern.
The Minister should conclude.
I assure the Deputy I will examine the recommendations of the next Bacon report in conjunction with the Minister for the Environment and Local Government.
Do I understand there is a third Bacon report?
Another report is due shortly.
