Vol. 488 No. 1
26 Mr. Yates asked the Minister for Finance the discussions, if any, he has had with the Central Bank or the social partners in relation to the potential for increases in the rate of inflation; the impact, if any, of an increase on the economy; and if he will make a statement on the matter. [5810/98]
Meetings are held between the social partners, including Government representatives, on a regular basis to discuss implementation of the Partnership 2000 agreement. Social consensus has been a very significant factor in the success of our economy. Pay moderation linked to tax reductions and increased resources in the social area, coupled with reform of the public finances, has given us the stable economic environment in which investment could take place and employment could grow. Social consensus has been a significant factor in keeping inflation at moderate levels in the past decade, falling as low as 1.5 per cent in the past two years.
At recent meetings between the Taoiseach, the Tánaiste and the social partners, all issues relevant to Partnership 2000 were discussed, including prospects for inflation. I am satisfied the combination of moderate pay increases linked to significant reductions in taxes under Partnership 2000 will contribute to the maintenance of sound economic conditions. Both my Department and I, in the context of our normal regular contact with the Central Bank, have discussed the prospects for the economy, including inflation. I recognise that potential inflationary pressures exist in the economy. However, current speculation about a significant increase in inflation is overstated and does not take adequate account of the complexities of likely market developments over the coming year.
My Department's forecasts for 1998, published on 3 December 1997 in the Economic Background to the Budget, projected a CPI increase of 2 per cent. This and other relevant forecasts will be reviewed at mid-year and the results will be published in the 1998 Economic Review and Outlook.
Will the Minister confirm the original forecast by the Department for inflation this year was about 2.25 per cent and forecasts are now emanating from the Central Bank of about 5 per cent? In this context what impact will inflationary figures have in striking the rate at which Ireland will join EMU? Will a short-term inflationary concern, in conjunction with the Central Bank forecast, be a factor in striking the rate at which we will join EMU, or will the long-term competitive advantage outweigh that? On the CPI, is the Minister aware asset-based inflation — house prices increased by 90 per cent in the past year — is not part of the equation in working out the CPI and does he believe this matter needs to be reviewed?
For the benefit of the Deputy and people outside the House — I have seen at least one other commentary which made this assertion — it is not correct that the Central Bank projected inflation at 5.5 per cent by the end of the year. That projection was made by an independent university economist who used a Central Bank model. In regard to asset-based inflation, that is not taken into account in the CPI. The CPI would be affected only if interest rates increase or decrease. Studies have been undertaken abroad on building asset inflation into a general index, but an attempt to do so in the United States was not successful. It has not been tried in Ireland or, as far as I am aware, in other EC countries.
On the bilateral exchange rate at which Ireland will join the EMU, as I pointed out on many occasions, that decision will be made during the first weekend in May when a pre-announcement of the bilateral exchange rates between participating countries will be made. All aspects, including inflation, will be taken into account in making that decision. For obvious good and sound reasons, I have steadfastly refused to speculate or give an indication of my thinking in that regard.
The Minister is right in saying the Central Bank has not made a projection of 5 or 5.5 per cent, but the Governor of the Central Bank recently made a projection of 3 per cent, 50 per cent higher than the Department's projection in December. Does the Minister agree with that projection and, if so, is he concerned about it? If he does not agree with it, will he give the reason?
The forecast for inflation for 1997, made by the Department of Finance and the Central Bank, was wrong. The outturn at 1.5 per cent as measured by the CPI or 1.2 per cent as measured by the HICP were well below the projections of the Department of Finance, the Central Bank and other independent analysts at the beginning of 1997. The projection by the Department of Finance at budget time for the average inflation rate for 1998 was 1.0 per cent. In mid-year that forecast will be revised. I have no grounds for revising it at this stage and it would be foolish to do so.
Does that mean the Minister disagrees with the Governor?
The projections for inflation by the Central Bank or the Department of Finance must be based upon certain criteria. The Department's projection was announced on 3 December and the forecast will not be revised until mid-year.
Has the Minister considered the action his Department will take to compensate recipients of social welfare payments who could lose substantially in real terms if the projected inflation increases occur? Will he consider putting in place a mechanism to ensure people in receipt of such payments will be compensated for their loss in the event of inflation rising above the 2 per cent projected level?
Most Members will agree that some of the hype about inflation in the early weeks of January this year was misguided. Some of it was deliberately engendered by vested interests who wanted to give cover to the fact that they were going to increase prices. The figures for January and February have not borne out their contention. These matters will be kept under review. I re-emphasise it is necessary in present economic conditions to keep inflation as low as possible because the people who will lose out when inflation rises, as we have seen in the past 20 years, are those on fixed incomes such as social welfare recipients. The responsible attitude adopted by trade unions and the social partners in taking the partnership approach has kept inflation at very low levels and that has helped economic growth while at the same time protecting people on fixed incomes, particularly social welfare recipients.
If inflation increases above the projected level of 2 per cent will the Minister consider a mechanism which will enable people in receipt of fixed incomes to be compensated? It is almost inevitable the social partners——
A question, please.
It is almost inevitable that the social partners, including IBEC and the trade unions, will seek to negotiate variations in the wage rates set out in Partnership 2000 with the Minister. It is only fair that those who, for various reasons, are not in the productive labour force be considered.
It would be foolish to speculate on what will happen regarding inflation. It would also be foolish to speculate on the various matters raised by the Deputy. Increases of at least 3 per cent were provided for in the budget to all those covered under social welfare. They were considerably higher for old age pensioners. At the beginning of the year my Department projected that the inflation rate for the year would be 2.0 per cent. The rate has not yet approached that level. The social welfare increases provided for by the Deputy when he was Minister for Social Welfare in the previous Administration were considerably in excess of the rate of inflation. I therefore do not wish to speculate on what may happen.
Does the Minister agree that if there are fears regarding inflation one of the ways to address them is to lock the punt into EMU at a higher rate? This would be a way of stopping imported inflation. It is not unreasonable to speculate on how this would balance against the need to sustain long-term competitiveness for our exports by locking into EMU at a lower value. The Minister may say that these matters will be considered in the first weekend in May. However, this aspect is of such importance that the Minister either does not know or will not tell us his proposals. Will he elucidate on whether the inflationary fears are such that they will be a paramount short-term consideration?
Perhaps the Deputy would indicate what he considers should be the rate at which the Irish pound locks into EMU?
I am not the Minister.
As the Deputy was so forthcoming on the issue he may like to indicate what he considers to be the correct rate. I am sure his constituents would like to know his views.
The Minister is not answering the question.
The needs of the whole economy will be taken into account when making this decision.
Does the Minister know what to do?
I have explained the process involved and the decision making process is one aspect. The bilateral exchange rate will be set for the Irish pound by taking into account all of the issues raised by the Deputy.
It will be all right on the night.
