Vol. 576 No. 6
11 Mr. R. Bruton asked the Minister for Finance his latest estimates of the improvement in the price index of imported goods and exported goods in the past 12 months; and the way in which those affect his estimate of inflation. [30118/03]
I assume the Deputy is referring here to the Central Statistics Office external trade release, which measures the price of traded goods. The latest CSO figures show that import prices for the first eight months of this year have fallen by 4.6% in comparison with the same period last year. That fall in the price of imports has a positive effect on Irish inflation, as it causes a reduction in the price of goods and services.
The price of exports, which has no direct impact on inflation, has fallen by 6% for the first eight months of this year in comparison with the same period last year. Inflation has fallen from an annual high of 5.1% in February to 2.3% in October, its lowest level in four years. That is as a result of the sustained strength of the euro and other favourable developments, including falling import prices and mortgage interest rates, and easing services sector inflation. My Department forecast in the budget, published last week, that inflation would average 3.5% this year, falling to 2.5% in 2004.
Does the Minister agree there is something radically wrong if import and export prices, which are essentially those of traded goods, are falling, according to his figures, by 5% while at the same time the prices of goods in the shops are rising? Is that not an indication that someone is taking a very substantial cut out of that extra margin? Are the Minister and his regulators not participating in the dual world when people trying to trade in the real world of external trade are taking cuts of 5%, or 8% in some cases? The utilities and the companies the Minister controls, including the ESB and An Post, have sought average increases of 20% in the past 12 months. Is the Government not living in an entirely unrealistic world regarding the pricing strategy that the Minister is pursuing while those competing in a tough world have to accept serious cuts in the price they are getting? Does he agree that people are getting fed up with the rip-off and stealth tax approach that has become so much a feature of the past two years?
I remind the Deputy that there is a one-minute time limit on supplementary questions.
The stealth tax is working out at about €1,800 per family since the last general election. People are paying a heavy price.
As I explained in my reply, the price of exports has fallen by 6%, but that has no direct impact on inflation. Most of our inflation is caused by outside factors such as the price of oil, the value of the currency and related matters. Service sector inflation has been higher in Ireland for several years, but it is now falling. It was down to 3.3% in October from 6.5% in February this year. Service sector inflation is on the way down. We calculate that the impact of the budget on the consumer price index will be about 0.4% next year. Inflation will be about 2.5%. I know that the Deputy, being Opposition spokesperson on finance, must make the best case he can. Part of that has been about stealth taxes and the cost of living. However, it raises a very fundamental question to which he would not subscribe if he were on this side of the House. We have taken the public utilities to which he refers, such as the ESB, An Post and CIE, away from the direct control of line Departments over the past decade or more, and they must put forward increases to pay their way.
The time limit also applies to replies.
CIE has put forward upgrade increases to meet its costs, and An Post and the ESB have done the same. There is therefore no consistency in saying that those organisations should be free of Government control and then saying that they should be back within it. That does not add up.
Regarding the price inflation experienced by small firms, particularly in the service sector, does the Minister not accept that utility costs, especially in the context of his increase in the base rate of VAT last year from 12.5% to 13.5%, are one of the reasons that so many small service firms in this country are finding it almost impossible to survive? The tax increases from the Minister's failure to index tax bands have made matters even worse for such small firms. What, if any, response does the Minister have to the burden on small, indigenous firms, particularly service firms?
The Deputy will have to give me some book to show how a failure to index tax bands has an impact on inflation. I would be interested to see it. We calculated that last year's VAT increase added about 0.79% to the consumer price index. Deputy Richard Bruton and others made the case on the other utilities, and I have replied to that. Public utilities must pay their way. Governments have made mistakes with them in recent years by not allowing them to have increases. The result was that when one had to have an increase, it was much more. A more rational way of doing things is to allow a steady increase every year in line with costs rather than putting off the evil day for whatever reason and having a big gazump in prices, be they CIE fares, ESB bills or whatever. A more rational way is to plan one's business. Businesses plan their pricing structures based on recovering their costs, and public utilities should do the same.
Is the Minister aware of the debate currently going on in the United Kingdom about how the underlying rate of inflation is assessed? Is he satisfied that it is being assessed here in the correct manner, or could it similarly be examined and a better way found of assessing the underlying rate of inflation?
There is no difference in the way any country in Europe calculates the underlying rate of inflation.
There is in the United Kingdom.
No, the Deputy is mistaken. Europe, for example, uses what is called the harmonised index. Differences between that and the Irish CPI relate mainly to mortgage interest not being included in the harmonised index of consumer prices, HICP. The United Kingdom can also give a harmonised index. At the moment, the HICP in Europe is forecast at about 2%. We expect to be down to about 2.3% by the end of 2004. We can give people the harmonised rate every month, but the headline rate is always the CPI. One can also have the CPI with or without cigarettes, mortgages or anything one likes. What the UK is doing relates to the rate it gives the central bank, which is to keep inflation at about 2.5%, the retail price index, RPIX, rate including certain items and excluding others. Gordon Brown has been signalling for the past few days that the UK will use the HICP rate all the time. The CSO gives that rate for us every month. There is no difference in the methodology for deciding these rates, it is simply a matter of which one people wish to use.
As I have said, cigarettes are a great example in the case of Ireland. One can see the consumer price index figure without cigarettes or alcohol for any week or month. However, this is to compare like with like. The basis of the methodology used to arrive at the figure has not been changed, rather what the figure is compared with. We hope to get our HICP rate down to the European average of approximately 2%.
It is approximately 1.8%.
Does the Minister propose to review the list of commodities included in the inflation index listing? While acknowledging arguments for and against it, what is the Minister's view on the continuing inclusion of tobacco products in the listing which is used in the calculation of inflation figures?
The Department of Finance has no role in this regard. It is a matter for the Central Statistics Office which applies international comparisons. Every five years, the CSO carries out a major household survey of the patterns of people's spending on drink, cigarettes, chocolates, cinema-going, mortgages and so on. The last such survey was carried out in 2001 and the CSO reset the basis of its calculations to ascertain, for instance, whether people were spending more or less on drink. When the CSO carries out its hundreds of surveys each month, it records the prices of goods in different categories. This is a statistical application. It has nothing to do with the Department of Finance.
The percentage of the population who smoke is now approximately 24%, down from approximately 32% a decade ago. This fact is reflected in the CSO's statistical analysis. The household survey is carried out every five years to record people's spending habits. I know a survey was carried out in 1996 and I think the last one was in 2001. Once the survey has been done, the basket of goods reflects such changes.
An argument has been made by my colleague, the Minister for Health and Children, about when tobacco should be included. I effected a significant increase in tobacco prices some years ago and gave most of the money to the Department of Health and Children that year, which many people thought a good idea. However, when it came to negotiating wages last year, no one suggested that we should deal with the CPI figure without including tobacco, including the media.
Although it is bad for people to smoke and drink, when one examines spending habits in totality, the CSO correctly identifies that these are the things people spend their money on and that should be reflected in the CPI. There is a logic to that.
There is a depreciating number in terms of—
The CSO carries out the surveys every few years. Therefore, there will be a lower rate the next time.
For the Minister to blame external factors such as oil is nonsensical. He quoted figures which indicated that import prices have fallen 5% in the past 12 months.
I did not say that. Whether inflation was rising or falling, I have always said that most of the inflation in Ireland is caused by external influences.
I strongly contest that statement. Is the Minister aware that, according to the CSO's figures in October, 100% of our inflation rate of 2.3% on that date came from the Government, either through direct and indirect taxes or from the various utilities under the Government's charge? Does the Minister agree that only monopolies owned by the State can charge 30% price increases in the current climate? Food manufacturers are taking a 4% cut, other manufacturing industries are taking a 9% cut and makers of capital goods in Ireland are taking an 11% cut. Despite this, the Minister suggests that it is good that the State monopolies can charge 20% and more. It is not great if one is in an industry trying to survive or one is working to pay one's mortgage and State enterprises are getting away with this.
The Minister's own anti-inflation strategy refers to the Government having regard to the inflation target in setting policy for those services in which there is effective State control of prices. The Minister and his regulators control these and are not applying anything like the pressures suffered by people in the private sector by ordinary workers and their companies.
I do not mean to give the impression that service inflation has no impact on the CPI, nor should I give the impression that the charges to which the Deputy referred were not a major cause of inflation in the past year. However, the public utilities, which he referred to as monopolies, have to recover their costs.
So does every business.
It is a separate argument whether they should be structured in a different manner and whether there should be more competition in these sectors, which is a debate for the House on which we will hear different views. I come to this argument from a certain viewpoint, which is perhaps similar to that of the Deputy in regard to public monopolies but different from the position of Deputy Burton and her party. How we structure public utilities is a separate question. While we remove them from the direct control of Departments, they should be in a position to formulate their own pricing structures. Whether they are run efficiently is a different matter.
The main determinants of inflation are outside factors. I said that when inflation was falling and rising. The Deputy is correct that the price of traded goods internationally has not risen in recent years. The factory gate prices will remain low for a number of reasons, including competition from eastern Europe and China, and there will be no increase. Therefore, we must be as competitive as possible. Moreover, the area of competitiveness needs closer and further examination.
