I am glad to be given the opportunity to outline the Government's position in relation to inflation. The most recent figures published by the CSO showed that inflation stood at 5.2% in May. This is a considerable increase compared to last year and represents a disappointment for the Government. We are naturally concerned about this high rate and share the concerns expressed by the Irish Congress of Trade Unions, the IBEC and others.
As noted by my colleague, the Minister for Finance, in the Seanad earlier this month, there are a number of factors behind the increase. These include the impact of the weakness of the euro, the international trend in oil prices and once-off factors such as the increase in excise duties on tobacco introduced for health reasons. While the increase in excise duties on tobacco added about 0.75% to the CPI, this effect will fall out of the index in December. Higher inflation in the services sector is also an important factor, including the ongoing and unacceptable increase in alcohol prices.
It is important to stress the impact of some external factors. As Senators are aware, we have one of the most open economies in Europe. In simple terms we import much of what we consume. A large part of our trade is with countries which are not part of the euro area, namely, the UK and the US. As a result, changes in the value of our exchange rate – now the euro – have the potential to significantly increase the price of goods contained in the consumer price index.
As Senators are aware, the euro has declined since 1 January 1999 when it was launched. It is estimated that the lower value of the euro has added over 0.5% to the CPI. The price of oil has also added to our inflation rate. The price of oil on international markets was about $11 a barrel in spring last year but it has increased almost threefold since then and is now hovering at about $30 per barrel. Given our dependence on imported energy, the impact of higher energy prices in particular has been significant, adding over 1% to the CPI for the period. The energy component of the overall CPI rose by over 12% in the past 12 months. Finally, increases in interest rates have also contributed to the rise in the CPI in recent months. Given these developments, the increase in inflation is to be expected.
In the coming months, as the Taoiseach has said, there will be a further rise in inflation due to higher energy prices and the impact of the recent increase in interest rates by the European Central Bank. However, inflation will begin to fall as the negative factors I have mentioned become less important, a view shared by most commentators and forecasters.
The Government is particularly concerned about the impact of the current 5% plus inflation rate on the Programme for Prosperity and Fairness. As Senators are aware, the Taoiseach, the Tánaiste and the Minister for Finance met representatives of the Irish Congress of Trade Unions on Wednesday to discuss the current situation. The meeting had been sought by the ICTU within the context of the new agreement. At the meeting the Government reiterated its commitment to achieve enhanced living standards both for those at work and those dependent on social welfare payments, as outlined in the programme. It was agreed that this would require an active process of management on the part of Government in consultation with the social partners. Developments in relation to inflation and living standards will be monitored over coming months and will be the subject of regular contact with the ICTU.
Moreover, it was restated that the primary objective of the Government and the social partners is the achievement of a better quality of life for all our people. Higher living standards are a part of this but the attainment of this objective also requires action in a number of areas. It was agreed that particular priority would be given to the issue of affordable child care, the development of public transport, the promotion of family-friendly work practices and mechanisms to encourage gain sharing in the workplace. These will be the subject of further discussions with the social partners in the months ahead.
It was agreed that a valuable contribution to tackling these and related issues could be made by the National Centre for Partnership and Performance, which is provided for in the Programme for Prosperity and Fairness. Arrangements for its establishment will be accelerated.
Despite higher than expected inflation most employees will see further increases in the real value of their take-home pay this year. The combined effect of income tax reductions effective from April and the standard pay increases under Partnership 2000 and the Programme for Prosperity and Fairness should generate average increases in nominal take-home pay of over 10%. This is in excess of the most pessimistic inflation forecasts. This comes on top of significant increases in real take-home pay over the last decade. Real take-home pay for those on average manufacturing earnings rose by 35% in the 12 years to 1999. This is in marked contrast to the declines in the first half of the 1980s. During the seven years to 1987 real take-home pay fell by over 7%. In this respect social partnership has clearly worked and the Government is fully committed to ensuring it continues to work in everybody's interest.
The employment statistics show the progress we have made. Employment increased by over 500,000 between 1988 and 2000 while the unemployment rate has fallen from 16.3% in 1988 to 4.6% according to the latest numbers. In overall terms, income per head is fast approaching the EU average.
Maintaining this economic success requires that we tackle inflation. More competition is a key element of our strategy. There is a need for further measures to promote competition and tackle anti-competitive practices in sectors where there is evidence of excessive margins. As experience illustrates, competition can have a large impact on price developments. For example, there is considerable evidence that air transport liberalisation has resulted in strong growth in demand and significant downward pressure on air fares. This has been a key factor behind the success of the tourism sector over the past decade. In 1998 there were over 18 million passenger journeys into and out of Ireland, three quarters of them by air. This compares to around 8 million in 1988. More recently liberalisation of the telecoms market is having a profound effect on prices. The cost of calls is falling rapidly. Costs fell by more than 16% in the three years to December 1996. Further falls are likely as competition intensifies.
The Government is pursuing a series of further reforms designed to boost competition across a range of markets. In February the first stage in the liberalisation of the electricity market took place. In March the Government launched the final report of the competition and mergers review group which reviewed and made recommendations on the future of competition policy. In April the Government announced a new institutional framework for public transport, including the introduction of competition to urban bus markets.
Further measures are at an advanced stage of preparation. These will include a vigorous programme of price monitoring and publicity to heighten consumer awareness, stimulate competition and identify evidence of anti-competitive practices. They will include selective measures to remove restrictions on competition and curb price increases. There is a need for specific targeted interventions in areas where measures to combat restrictive practices and stimulate competition are proving difficult or likely to take time to be effective. Full details of these measures will be announced next week.
It has been suggested that the Government should lower indirect taxation to reduce inflation. No options in this regard have been ruled out. Careful consideration will be given to proposals put forward in the context of preparations for the next budget in December.
I wish to refer to the housing market. The rapid increase in the price of housing in recent years is one of the undesirable consequences of our strong economic performance. The problems faced by young people in entering the housing market are a major cause of concern. As a society this situation represents a fundamental challenge that we must address.
The Government recently approved a further package of measures for the housing market. This follows the publication of the third report by the economic consultant, Mr. Peter Bacon. The measures which the Government is implementing are designed to achieve a number of key objectives, among which is to increase further the supply of housing. It must be acknowledged that much has been achieved. There has been progress in a range of areas, including the serviced land initiative, major water and sewerage schemes in the greater Dublin area, road access schemes and additional resources for An Bord Pleanála and local authority planning departments. This is leading to some success. Last year 46,500 new houses were built, which was the fifth consecutive year of record output. However, as the Bacon report pointed out, if we are to meet demand we need about 55,000 new homes per year in the private sector.
In these circumstances we have implemented measures aimed at managing the demand side of the market. In particular, the Government sought to strengthen the position of first time buyers to curb speculative demand for housing. Taxation measures are a suitable instrument to help accomplish these goals. The measures announced last week, and already given effect by a financial resolution, include a comprehensive restructuring of the stamp duty regime. These changes will work to the advantage of first time buyers and other owner occupiers.
Last week the Government also announced a new anti-speculative tax which is to have effect from 15 June 2000. This tax will apply at the rate of 2% of the market value of residential properties acquired on or after 15 June, other than principal private residences. Senators will have an opportunity to discuss these taxation measure in greater detail shortly when the Finance Bill to give them effect comes before Seanad Éireann.
Throughout our term of office the Government has been proactive on the housing issue. We understand the frustrations many people are experiencing, especially those who are contemplating buying their first home, due to increasing house prices. As noted, the most recent study commissioned by the Minister for the Environment and Local Government and the Minister of State was the third such exercise. Where the studies have recommended measures these have, by and large, been put in place rapidly. The Government has not hesitated in introducing appropriate changes to the taxation system to improve the position of first time buyers and other owner occupiers.
I reiterate the Government's concern about price developments. We are confident inflation will, over time, fall below current levels. However, we are determined to take whatever action is necessary to reduce the current rate as quickly as possible. This is essential if the Government's achievements, including record employment growth and low unemployment, are to be sustained into the future.