Seanad Éireann - Volume 163 - 23 June, 2000
Inflation Rate: Statements.
Mr. M. Smith Mr. M. Smith
Minister for Defence (Mr. M. Smith): 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.
Mr. J. Doyle Mr. J. Doyle
Mr. J. Doyle: It is no reflection on the Minster, but Members believed the Minister for Finance would attend the House today to discuss this very important issue. We are disappointed neither he nor the Minister of State at his Department is not present.
When I spoke on the Adjournment debate last Christmas I drew the attention of the House to the fact that inflation was increasing once again. It was not then popular to talk about the issue as the rate of inflation was only 2.5%. Nevertheless, I expressed concern that the rate was beginning to rise, and so it has. The inflation rate is now 5.2%, the highest rate in Europe and the highest we have experienced in 15 years.
On the Second Stage debate on the Finance Bill, I devoted a major part of my speech to the rise in inflation. At that time the rate was 3.6%. In his reply, the Minster for Finance stated that it might increase to about 4% but that it would taper off at that point. Unfortunately, that has not  happened. We now have the highest inflation rate we have experienced for a long number of years.
I detest inflation because I have seen the damage it has caused to economies during my lifetime. It is disastrous and morally corrosive and it destroys lives. The disturbing thing about inflation is that those who can best protect themselves or even gain from it are often those who have most, while the losers are those who have least. It is, as I once said on the Order of Business, a tax on the poor and a free tax benefit for the rich.
For these reasons there is a moral obligation on the Government to take measures to reduce the rate of inflation. It must find a formula to control it and restore the value of the pound, especially for the lower paid workers and those in receipt of social welfare benefits. It must implement appropriate fiscal controls to tackle inflation.
The Government must be taken to task for its ineptitude in dealing with this problem. Initially, the Government denied that inflation would be a problem. Then it said that it was a problem, although a limited one which might not last and that whatever was causing inflation had nothing to do with the domestic matters, it was all imported. This theory has now been exposed. The current rate of inflation is the highest for 15 years and it is the biggest economic headache the Government has had to face since coming into office.
No doubt the problem of inflation, taken together with the surge in property prices which the Minister has addressed, has the potential, if not resolved, to prevent the Government's re-election. These are the two issues on which the next general election will be fought – inflation and property prices. They are real issues, not like some of the phoney issues being discussed in the media. They are the real issues because they hurt every citizen's pocket, especially the lower paid and the less well off in society.
The Government could claim that it has been unlucky with the sudden rise in inflation and that it could not have foreseen the sudden rise in the price of oil and the collapse in the value of the euro. Even the trade unions, which signed up to the pay negotiations and a pay rise for workers of 15.75% over 33 months, did not see that happening.
Last week the Minister for Finance, Deputy McCreevy, stated that he believes inflation is a product of success. He said that no other country has had a high rate of growth, very high unemployment levels which had fallen and the amount of spending in the national development plan. In saying that, he ignored the fact that the US has enjoyed high productivity and low inflation over the past number of years and also that our near neighbours in Britain have enjoyed eight years of steady growth while incurring inflation of only about 2%. The Government might like to blame external factors for the rise in inflation but it is really a domestic problem. General services  inflation is over 6%, reflecting the labour shortage, high wages and the willingness of consumers to pay higher prices.
No doubt joining the euro in January 1999 was one of the main causes of the surge in inflation. Interest rates were reduced to 3% on joining the euro. This was an entirely inappropriate low cost of borrowing, given the pace at which the economy was growing at that time. It is interesting to note that inflation has increased from 2.1% to 5.2% since January 1999, yet the base rate for the euro is 4.25%, and there is little chance of this being increased before September at the earliest because there are fears that a 0.5% increase might, in itself, do much damage to the main euro economies of Germany, France and Italy.
We are now in the extraordinary situation in Ireland where real interest rates are negative. It pays people to borrow money and, as a result, saving is penalised. It is no wonder that private borrowing is increasing at an annual rate of 30%. Mr. Willie Slattery, a former employee of the Central Bank, has on a number of occasions in recent times issued warnings regarding the rapid increase in private borrowing. If we are to halt the inflationary spiral which we are experiencing at present, then it is important that the agreement negotiated under the Programme for Prosperity and Fairness holds. I know trade union leaders are facing pressure from their membership, who signed up to this pay deal on the basis that inflation would not exceed 3%. With inflation running at almost twice that rate, those workers now want a compensating wage round. I am pleased to note that their officials understand a basic rule of economics, that pushing up pay rates will not stop the rise in inflation. In fact, increasing purchasing power is almost certain to further increase inflation.
I want to acknowledge the lead given by Senator O'Toole in this matter. He believes that the Government's priority must be to use the Programme for Prosperity and Fairness to tackle, as he put it, the twin problems of inflation and wage value erosion. He is on record as stating that, beside cuts in indirect tax and price controls, congress will want a declaration from the Government that it will use its December budget to restore workers' earning power through cuts in income tax, which were promised in the programme.
It is unfortunate this debate is taking place this morning because the ESRI report was issued today. Although I have not had an opportunity to study it, I see from a glance that it is opposed to the reduction of taxes at the next budget and has suggested that they be delayed. That is very unfair, especially to the less well-off in our community, because they are the ones who will suffer, so they must get the benefit of income tax reductions. The Minister, Deputy McCreevy, would be right to ignore the advice of the European Commission and introduce further tax cuts. If labour shortage is one of the main causes of wage inflation, it must be dealt with. Tax cuts  may fuel inflation, but they are needed to encourage people to join the workforce which, in turn, could reduce the problem of wage inflation. A fiscal stimulus may, paradoxically, be good.
Many experts now claim that a cut in indirect taxes, either in VAT or excise duties, on items such as drink or fuel, could help reduce headline inflation, assuming that companies and retailers pass on this reduction to consumers. It must be a priority for Government to ensure this happens. There is no good in reducing indirect taxes if the benefit is not passed on to the consumer. Some critics will say that this will make things worse by putting more money in the pockets of consumers. However, cuts in indirect taxation might reduce the headline inflation rate and that could have the effect of fending off other pay claims, especially in the public sector, until inflation begins to decline to its previous lower levels.
There is one bright light at the end of a dark tunnel for the Government. The recovery in the euro may be a slow process given the lack of confidence in the currency market in European economic management, but it could happen by default as sterling and the dollar lose value. In the past month alone, a considerable amount has been knocked off the excessive value of sterling. We must acknowledge that a sensible interest rate policy in the UK means the economy there is cooling to a manageable pace with the inevitable impact that has on sterling.
The Taoiseach is on record as pledging to curb high inflation by tackling profit-taking and promising competition. He stated he would not allow a situation where excessive profit-taking occurred, especially through anti-competitive practices. There was evidence of opportunistic profit-taking in the price of services such as food and drink, and I am pleased to note that the Government has committed new resources to the Competition Authority to aid its work. I hope it will strengthen its ability to protect consumers and business alike.
If the Government is serious about tackling inflation, it must address the problem of labour supply. It must do all in its power to continue to develop the workforce. It must increase the numbers in employment, and the obvious sources are females in the home and immigrants. Last month, a leading firm of stockbrokers suggested that the number of people at work would increase by 83,300 this year, but the labour market still needs a further 24,500 workers to meet demands. It said that tax reform and a clear immigration policy would be required, with substantial tax reductions needed to attract married women into the labour force and more labour from Britain, where taxes, especially for a single person, are much lower. They also wanted an extension of the existing visa scheme to experienced service sector workers and supported the proposals of the Minister for Enterprise, Trade and Employment to issue work visas to non-EU nationals with construction, nursing and information technology skills. That is where demand for employment lies.
 While the time has come for the Government to persuade public opinion to accept and embrace immigrants, its policy towards asylum seekers, however, has created the impression that they are all scroungers. Its failure to promote a positive approach could be partly explained, if not excused, if there were high unemployment, but not at a time when there is a labour shortage. It is a policy that also ignores the British and European experiences that the majority of immigrants work and support their dependants and add entrepreneurial zest to the country in which they live. I have no doubt that allowing more non-Irish workers into the economy would help keep down inflation, but it would also have other implications for society and the Government must not be found wanting in giving a lead in this area.
It is time for the Government to stop talking down inflation as some external nuisance over which it has no control and face up to the responsibility it has as a democratically elected Government to tackle domestic inflationary pressures to stop them from raising their ugly heads in the economy. Tackling labour shortages through an enlightened immigration policy, encouraging the supply of people into the workforce through decreasing effective taxation at the lower end of the labour market, promoting competition and combating restrictive practices in the services sector are all policies the Government can and must implement. If the Government fails to do so, it will not be returned at the next election. The two main issues on which the election will be fought will be inflation and high property prices.
When the Minister for Finance addressed us during the previous budget, he was in very bullish form and said the Government was in a win-win situation. I warned him then to be careful as he might score an own goal. The Government has scored that own goal because the previous budget gave too much to the well-off and not enough to the less well-off people in society. In doing that, it fuelled the economy and caused the inflation rate we have at present.
Mr. Finneran Mr. Finneran
Mr. Finneran: I join with my colleague in Opposition in welcoming the Minister, Deputy Michael Smith, to the Seanad. I am pleased the Leader and the Leas-Chathaoirleach afforded us the opportunity to debate this important economic issue, namely, the rise in inflation. This is the third debate on the economy we have had in six months. We dealt with the budget and had a long debate on that. We dealt with the Finance Bill and we now have an opportunity to make statements on the economy again. This has been called for by a number of people in past weeks, especially those from the Independent benches. I hope that, when they contribute, rather than criticise and question, they will come forward with solutions because, while there have been many questions in the contributions on the Order of Business over the past four weeks, there have been no answers. I expect the learned gentlemen  from that side of the House to come forward with some constructive proposals.
This country and economy is a victim of its own success. To explain that, I reflect back to the mid to late 1980s when this country was on its knees from an economic point of view. The creditors were at the door and young people, especially graduates, were boarding planes and boats and heading for Europe, the United States and Australia because no jobs or opportunities were available here at the time. In 1987, the then minority Government through the then Minister for Finance, Mr. MacSharry, put in place a series of drastic measures to redress the fact that the economy was on the wrong road. That Government and subsequent ones can take credit for the position in which we are today. It was achieved through measures initiated at the time and followed by subsequent Governments.
The most important feature of all the Governments was their ability to enter into social partnership agreements with employers and trade unions. If there was a cornerstone upon which our success was built, it was the understanding and recognition by the trade union movement, employers and Government that, if we were to emerge from the economic mess in which we were, we had to work together. Social partnership has been the cornerstone of our success.
We now have growth in the economy of up to 10% per year and we have budget surpluses on an annual basis. Unemployment has been virtually eliminated and stands nationally at about 4%. Long-term unemployment is at about 2%, which we thought was unachievable.
Although there has been much success since the late 1980s, there are problems. We are a victim of our success. It is believed there are up to 60,000 job vacancies, which has created pressures. The demand in the area of employment has caused wage increases and consequent service cost increases. External factors should not be ignored. At no time did any Minister for Finance or Taoiseach indicate that our open economy was exclusive of outside pressures, as has been suggested. No such statement was made by the Minister for Finance or anyone deputising for him, certainly during my time in the past three years as Government spokesman on finance.
As an open economy we have been conscious that outside forces could interfere with our stability and that is as relevant now as it ever was. It can be seen in two areas. The first is in the area of oil prices, which are not decided at the behest of this or any Government in the western world but are controlled and sometimes orchestrated by OPEC. I am pleased that in the past few days OPEC has decided to increase the output of oil. I have no doubt that will have a positive impact on our economy but it will take time to kick in.
The second factor is that we have seen a decline in the value of the euro. There was a wonderful debate here on the euro on its initiation. We were all in favour of it and hoped it would trade favourably with the dollar and the yen, but  this has not happened to the extent we expected. During debate on the euro, Senator Ross may have been the very prominent dissenting voice but it has stabilised vis-à-vis its strength against the dollar and sterling and we will see an improvement in its position. This will give rise to a positive response from an international viewpoint with regard to inflation. Those two factors have had an effect on inflation.
The real problems are on the domestic side. I have referred to the great numbers of people needed to take up between 55,000 and 60,000 job vacancies. That creates demands and increases the pressure to pay higher wages, which in turn impacts on the price of goods and services. That has been the case in recent times. I question the level of increase being imposed in some service areas which appears to be above and beyond what is justified. People are cashing in on the situation in which they find themselves. To an extent, they abuse the introduction of the minimum wage of £4.40 per hour by causing prices to spiral, particularly in the service sector. The minimum wage in the UK is £1.20 less per hour.
Price control is not the answer and it is a philosophy I do not believe in. There should be more competition and an increase in the labour market. More training is required and greater opportunities should be created for people to work here. This could be achieved by providing work permits. It is important to focus on these issues. In the past we focused on re-training and on getting people back into the job market. As that resource has been exhausted, we must look to our emigrants and to those who regard this country as a suitable place in which to work and live.
Competition is the base line for any market. It is suggested that if price controls were introduced in the Dublin area, particularly in the pub business, it would bring down the price of alcohol. The bottom line is that more licences and competition in the market are needed. Pussyfooting with price control is not the route to take.
Increases in mortgage interest rates have had an effect on inflation also. My analysis is that we have come a long way through partnership. We are a victim of our success and are reaping the down side of having reached employment saturation point, with price rises in the domestic market. It is a time for reflection. Those who signed up to the Programme for Prosperity and Fairness should reflect on our present circumstances. It should be looked at in an overall context. We are only a few months into this programme and it will last 33 months. While there is an inflationary content, some of it has been fuelled by the budget. The increase in the price of tobacco for health reasons has caused problems but, as the Minister stated, it will level out towards the end of the year.
We should consider the benefits achieved through social partnership. I would say to those who are claiming there must be renegotiation and that the Government should take drastic measures that we should steady ourselves and  look at what has happened since the late 1980s. It should be addressed in the overall context of what we have signed up to for the next three years. There is an opportunity in the overall package for a major increase in wages – a 16% increase – and a massive tax break. These two factors are safeguards in the situation in which we find ourselves. As the Minister said, even with the worst prospects there is still an opportunity for a 10% increase in wages this year. Those entering discussions and negotiations with regard to our temporary predicament should reflect on that.
Many people returning here find the country attractive to the extent that salaries and the general environment are good, but they find it very hard to get into the housing market because prices are excessive. The Government is putting in place important measures to address the problems in that area, but we must take things a step further. We must look at the national development plan in the long-term and populate areas outside Dublin, as mentioned in that plan. We must accelerate that trend in the midlands, the northwest and the southwest but we cannot leave its implementation to the local authorities.
I have 20 years experience at local authority level. I was chairman of the General Council of County Councils in the 1980s. Local authorities are not geared to deal with what is required over the next ten or 15 years. Many county council executives have tunnel vision. They are more interested in the picture as presented from a European point of view – a lovely environment with no more activity that we currently have. Would that it could be so, but it is impossible. This country has a growing population and the Government must put in place measures to address that growth. I do not believe local or regional authorities can solve the problem.
Europe is intent on ensuring things are dealt with at a local and regional level, but there is a need for strong national policies to populate areas outside Dublin. I welcome decentralisation but I do not think that alone is sufficient. We must create new Government-led cities. It is necessary that we do this in the midlands, north west and south west. I hope the Government will pursue that issue with vigour.
Matters relating to the groceries order have been brought to my attention. I believe in competition and the free market. Repealing this order will cause major problems for independent grocery retailers. Forty per cent of small villages in England have no local shop and it would be devastating if that were to happen here. It would take away the fabric of villages. We should reflect upon that when considering the repeal or alteration of the groceries order. I do not want to see a development similar to that which happened some years ago when we lost post offices, Garda stations, schools etc. We should not have to fight to hold on to the local corner shop in the interest of protecting the fabric of rural Ireland.
Senator Quinn is an expert on the grocery  trade and would have a particular view on this matter. My view is that we should maintain the facility for people to shop locally. We should also maintain the independence of the grocery trade and ensure it is not swallowed up by multinationals. I would not like to see that happening.
Some of the decisions taken by arms of government are contributing to the problems we are facing. I heard two Senators from the Dublin area bring to the attention of the Leader of the House the intention of Dublin Corporation, an arm of government, to increase its parking charges in the city by 50%. Surely it is conscious of the national interest and that it is contributing to rising inflation by imposing such an increase. In many cases people have to bring their car to work. An extra £10, £15 or £20 a week charge in parking fees would mean they take home less pay. That will be highlighted by the trade unions representing those workers when they come back to the negotiating table. Dublin Corporation should reflect on that decision.
The Minister for Social, Community and Family Affairs has given an increase of £7 per week to non-contributory old age pensioners. Within a week of that increase being made available local health boards implemented a reduction of £6 a week in the rent allowance, resulting in the pensioner gaining a £1 increase. I compliment the Government on the good work it is doing, but the next tier of government, be it at local authority or health board level, has a national responsibility in this area also. It must dovetail into national policy. It is scandalous that a health board should grab £6 of the £7 increase given by the Minister for Social, Community and Family Affairs to old age pensioners. That defeats the good intent of the Government, the Minister and those involved in social partnership.
There are many areas on which I would like to speak but time has run out. I applaud all who have contributed over the years to social partnership, which has been the cornerstone of our success. It should not be thrown away at this juncture. We are in the first months of a 33 month partnership deal and should reflect on what is involved.
The Government will implement measures that will ease some of the pain, if not all of it, which some sections of our community are experiencing. I hope the message goes out that this is not a case of the Government against everyone or vice versa. This is the Irish people looking after the interests of this and future generations.
Mr. Ross Mr. Ross
Mr. Ross: With the permission of the House and you, a Leas-Chathaoirligh, I will share my time with—
Mr. Quinn Mr. Quinn
Mr. Quinn: I do not think there is any need for that.
Mr. Finneran Mr. Finneran
Mr. Finneran: I think the House will be richer for having listened to Senator Ross for 15 minutes.
Mr. Ross Mr. Ross
 Mr. Ross: I welcome this debate, which was reluctantly granted. It is appropriate, as Senator Doyle said, in light of the fact that the ESRI report criticises the measures which the Government has not yet taken. That marks the end of the ESRI as the Government's house trained poodles.
The significance of this debate is that it does not mark the rescue of the PPF, it marks the end of the pay deal. I have listened to a lot of fairy tales here for the last few weeks. Everyone trots out the same old jargon about the PPF, saying that the pay deal is in danger and will be broken if we do not do something about inflation. There is no pay deal. Let us forget that fiction. Do we think that Intel, which has supposedly created 1,000 jobs, on which we have attempted to piggyback already today, is going to take any notice of the pay deal or the PPF? It could not care less.
When Senator Finneran parrots the Fianna Fáil line, as we expect, saying that social partnership is responsible for our great economic success, where does that leave the multinationals? They have not given two hoots about social partnership from beginning to end. Does anyone know how Intel will get the 1,000 workers it needs? It will get them partly by offering perks to employees, but if necessary – and it will be necessary – Intel will pay 15% to 25% more to people to come here. Where is the pay deal? There will not be a whisper from the Government, the Opposition, the IDA or anyone else about breaches of the guidelines because Intel is involved. The pay deal does not exist. It is a fiction that exists between the Government and the unions playing tic-tac with each other in keeping the figure at 5.5% this year. We all know that, including the unions.
The pay deal was broken in its first week by the bus drivers, while the ASTI withdrew from it before it was born. It will continue to be broken by those who say the way to get increases of over 5.5% is through benchmarking and productivity. That is a little dodge, but I can see now that the process for benchmarking and productivity will be accelerated – wait and see. What does it mean? It means wage increases and that the pay deal is a fiction; it is a line in the sand that anyone can cross. We will go on for the next 33 months saying the pay deal is in danger and there will not be a sinner in the country with as little as 5.5% except a few mugs like me in the NUJ. The NUJ signed up early to the pay deal, condemning a lot of us to 5.5% for a few years. We are mugs. I do not mind particularly as I have other sources of revenue, such as a salary from this House.
Very few people will abide by this pay deal, yet it is a wonderful flag for the Government and unions to wave, as they can say that they must abide by 5.5%. That has not happened and will not happen. The Government and the unions will do what ICTU wants them to do in this case. Why did the Minister say today that the Government is concerned by the high rate and shares the concerns of ICTU, IBEC and others? I am sick and  tired of this sharing of ICTU's concerns. The Minister went on to list the ICTU agenda, but we should wait to hear what Senator O'Toole wants, as it will be in next week's package.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: I wish.
Mr. Ross Mr. Ross
Mr. Ross: It is all agreed at this stage, although he may make a few more demands in order to get more in a few months.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: Would that it were so.
Mr. Ross Mr. Ross
Mr. Ross: When we talk about inflation being 5.5%, what we hear is, “Don't worry lads, we got a tax package in December so you are beating inflation.” That tax package was in people's pockets long ago and was supposedly nothing to do with ICTU. It was supposedly the budget, not negotiated by ICTU, but a spontaneous response from the Government to the needs of the people. It was not, of course – it was negotiated by the two big pillars of Irish society, ICTU and IBEC, though with less involvement from IBEC, and then presented as a Government package. It is noticeable that the Minister referred to ICTU and consultation and what ICTU wants while mentioning IBEC in passing, but he knows that IBEC, as it always does, will roll over. The measures being introduced will be measures IBEC does not want, but it will roll over and accept them for the sake of the pay deal as short-term measures. That is what we are about to see – short-term measures that will not work. The measures mentioned by the Minister, the unions and today's newspapers will not work.
One of the best descriptions of those measures was given by Mr. Danny McCoy of the ESRI.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: Not one of Senator Ross's favourite groups.
Mr. Ross Mr. Ross
Mr. Ross: Without interruption.
Mr. Costello Mr. Costello
Acting Chairman (Mr. Costello): Senator Ross without interruption. Senator Ross should not provoke Senator O'Toole again.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: If Senator Ross is quoting the ESRI anything can happen.
Mr. Ross Mr. Ross
Mr. Ross: I may need an extension of my time if there are any more foul tackles. Mr. McCoy said, “These measures are just messing with the thermometer, not easing the overheating in the room.” That is the whole point. Next week we will have a lot of measures designed specifically to bring down the monthly figures. It is not very difficult and can be done by cutting the price of drink and subsidising transport. That is what will be done and it will bring down the figures for a month or two, but anyone with any nous or experience of the economy knows, as Mr. McCoy says, price controls can keep a lid on prices for a short while, but they will then burst out.
We are going to create trouble for ourselves  down the road. This knee-jerk reaction to inflation is designed to get Senator O'Toole and Peter Cassells off the Government's back for a month or two so that they can go back to their members and fool them into believing they have a great deal. The fact is that Senator O'Toole and his friends were suckered into accepting 5.5% when inflation will run ahead of that. That is not a great deal. They did not know at the time, which makes it worse, but if they did not know what inflation was at the time, why did they not include indexation? They have delivered nothing to their members with this deal and now they are coming back to try to rewrite the rules. That is how the country is run – the rules will be rewritten for them temporarily, but we will have more problems with the budget in December and further down the line, when they want more and more.
Their members will sooner or later see this deal for what it is, a contrived, artificial deal to keep trade union leaders in good jobs and to keep the Government in power. It is not in the interests of any members of these unions. If they had free collective bargaining they would have better deals and those who work hard would get a lot of money, while those who did not would get very little money. Instead we have the pay deals so beloved of Senator Finneran which give flat increases across the board. Those days are over in reality. We are paying lip service to a deal involving 5.5% over 33 months, but it is irrelevant. Most pay deals will ignore it and it will hardly apply in the private sector at all.
The response of the Government to this concern about inflation is inadequate. I noticed what they had to say about being disappointed and concerned but there is a problem here that the reasons being given by Government spokesmen and apologists for inflation ring true, to some extent. However, an even bigger problem is that there is very little that can be done about it because those reasons are partially external and partially the creation of the Government.
The Minister claimed the fall in the euro is the problem. Who took us into the euro? Now we are blaming it for all our problems. The reason we went into the euro was to keep inflation down. Now we are being told that the euro causes inflation. We, as a nation, went into the euro speculating that it would go up, or go up a little. We did not really think very much, we just went in. However, we cannot now say that the purpose of that decision was principally to keep down interest rates and inflation and then blame it for having the opposite effect. Were they wrong or were they just wrong about the direction in which the euro would go?
I was alarmed by the statement by Senator Finneran who said everything was okay with the euro now and that it has started to go up. I thank him for the tributes he paid me for being a lone voice in warning about the euro – I did not. All I really said was that it was dangerous to assume the euro  would be a strong currency, and I was probably right about that. Everybody else assumed it would be a strong currency and Government policy was based upon stability not only of the euro but of interest rates.
Senator Finneran is right that the euro is one of the reasons inflation is going up. He is right as well that there is very little we can do about that, but he and Government spokesmen are wrong to say continually – I have heard this said in the House so often – not to worry, the euro will go up and we will all be okay. That is not true. It might or might not go up – nobody knows. It is, however, an extraordinary way to base Government policy.
The second reason given by the Minister for inflation was the old chestnut of oil prices. I do not quite understand why this is always given as a reason for inflation. He is right, of course, but our problem is not the rate of inflation but the difference between our rate of inflation at 5.2% and the European average of 2% or 1.9%. They import oil as well and have the same problem, so it cannot be the reason for the difference. We should not hear that.
The Minister went on to say – this was one of the most revealing points in his statement – that we have a problem, that it is imported inflation and that 50% of our trade is with the UK and the US. That is the first time in many years I have heard that coming from the Government. Touché – the Minister is right and that is the reason we should not have gone into the euro when we did. Now he is saying we were wrong about that as well. They never mentioned it at the time but now they are using it as an excuse. The euro is going to be the currency which takes all the blame for Ireland's economic woes from those who went charging in without seeing the dangers.
I agree with those who say it is very difficult to do very much about it. It is like trying to unscramble an egg or to put an egg back in its shell from an omelette – it is not possible. The situation is not a hopeful one because what we have is an economy which is virtually out of control. The Government is now using words like “concern” and “disappointment” which are, I suppose, euphemisms for panic. It is using words like “overheating” which it did not use some months ago and which is a euphemism for a blazing furnace, an economy that is out of control. The Government does not give much hope on this issue.
We have to ask a couple of very fundamental questions about the economy which is overheating. Senator Quinn was the first to spot inflation as a real danger many months ago. Is growth at this particular rate a good thing? Should we be thinking the unthinkable and saying growth has got to be kept at a certain level? We read reports from brokers, the ESRI, economists and everybody else which continually claim that growth of 10%, 11% and 12% is wonderful. There has to be an upper limit to growth because excessive growth is inflationary. I do not know where it is  or where it should be, and I do not claim to know that. We have to question the benefits of growth.
We also have to question – this is fundamental to some of the State agencies about which I do not have the time to make a coherent argument – whether the drive for job creation should now come into question. Should the IDA or what is now known as Enterprise Ireland be trying to create jobs as fast as possible? There is a real difficulty about the mantra that we “created employment here, created employment there”. What we are doing now is creating vacancies. Senator Finneran quite rightly pointed out that there are 50,000 or 60,000 vacancies. That is very dangerous.
Unemployment is no longer the problem it was, although it is in certain areas and among certain people. Long-term unemployment now runs at 1.9%, which is negligible. The idea that economic policy should be based on growth and creating jobs is dangerous and questionable.
Mr. Gibbons Mr. Gibbons
Mr. Gibbons: I welcome the Minister and the opportunity to add my thoughts to this debate. I have been concerned about the way inflation has been rising for some months. A number of factors – the Minister has outlined the main ones – have caused the rise in inflation in recent months. Senator Ross is correct that what is important is not the absolute level of inflation, but the relationship between it and that of our competitors. It is important to bear that in mind. The rate of 5.2% compared with 2% in the rest of Europe is very worrying and we must do whatever we can to reverse it.
The situation in which the Government finds itself is that it has to look at the options to see how that can be done. A number of things can be done but the effects of these have to be assessed in terms of the continued competitiveness of the economy and the effect on the workforce.
The demands of some people for huge profits are contributing enormously to inflation in an indirect way. The price of drink is one factor of which we are all aware. It has come to my notice in the last week that blocklayers in the building trade are looking for as much as £500 a day. This type of situation may be sustainable on a given job, but is economically unsustainable over a longer period. We have to cap such practices.
Part of the reason for the rise in inflation is the great economic success of recent years which has raised everyone's expectations. Many people feel that one must make hay while the sun shines. However, occasional rain is necessary to ensure next year's crop. This is an opportunity for such a shower or rain to allow us think, simmer down and face the problem in a coherent manner.
The price of oil has played a significant role in the increase in inflation and accounts for about 3% of the rate. We have no control over the price of oil and Senator Ross stated that the fact that other EU countries also import oil means we cannot take it into consideration as one of the contributing factors. However, the Senator forgot to  mention that Ireland is more dependent on oil than the rest of Europe and that must be factored into the situation. We can play around with statistics to suit ourselves but it is important to deal with real facts and face up to the difficulties.
The Government could introduce a number of measures to deal with the problem. One such measure would be a reduction in VAT. A 1% cut in the standard rate of VAT from 21% to 20% would take about 0.4% off the consumer price index. A 2% cut would obviously reduce it by 0.8% and would bring us into line with the rest of the EU. This is worth considering. This assumes that the full impact of price reductions are passed on to consumers but that is a difficult assumption in a buoyant economy. The gross cost to the Exchequer of reducing VAT by 2% would be about £200 million so we must consider these options as we are talking about a lot of money. The economy is buoyant and Exchequer returns are very good, however, we must think matters through properly.
The increase in excise duty on tobacco introduced in the last budget has contributed 0.88% to the rate of inflation. The Minister pointed out that this is a significant increase. The difference between the European average rate of inflation and the Irish rate is 3%, so removing the increase in excise duty on tobacco would take away a quarter of that difference. I am not sure it is the right thing to do as the effect of tobacco on the CPI would disappear by the end of December. The measure was introduced as a health measure and not a means of raising Exchequer revenue.
The large increase in the price of oil over the past year must also be taken into account. A cut of 5p per litre in excise duty on petrol would reduce the CPI by 0.3%, the maximum cut allowed by the EU. When considering this option it is important that the saving, which would be about £95 million, would be passed on to consumers. Likewise, a 5p cut in the price of a pint of beer would reduce the CPI by 0.2%, but it would only have the desired effect if the saving is passed on to consumers – such a measure would cost about £45 million.
These are some of the options open to the Government to address the problem, but it is particularly important to decide on our objectives. The Government has a number of objectives, one of which is to be seen to be doing something immediately to keep the Programme for Prosperity and Fairness on track. It is important that reductions in VAT and other duties are passed on to consumers. We do not want people profiteering from these measures, but that is a danger. It is important that these measures benefit all workers.
Another objective must be to engineer a real decrease in the CPI as quickly as possible, in which case cuts in indirect taxes would seem the best option. We must also make the economy more competitive by a range of measures to identify areas where very generous margins are being  earned, such as in the brewing industry. We must promote real competition in these areas.
These are longer-term measures. Senator Ross said we do not want to introduce measures which will provide a degree of window dressing in the short-term. We must implement measures which keep the economy competitive and that must be our first and most important objective. These measures must last and must be passed down the system to consumers.
I look forward to the announcement of the Government's measures next week. Social partnership has been one of the primary reasons the economy is doing so well and that so many more people are working today compared to ten years ago. We must maintain social partnership but introduce measures which will see that partnership and the economy continue to perform as they have been doing.
Mr. Quinn Mr. Quinn
Mr. Quinn: I welcome the Minister to the House. Senators may have wished to have the Minister for Finance, Deputy McCreevy, in the House but we are quite happy to have any Minister present for this debate. I would have welcomed the Minister for Finance to the House for one reason. During the week he said that Governments sometimes have to take unpopular decisions, and that is what we will have to do if we are to encourage competition. We will have to face up to the howls of protest from vested interests who will be unhappy with steps taken to encourage competition. I was impressed by the contributions of Members. Senators Finneran and Gibbons talked about encouraging competition. I have said before that the job of the telecommunications regulator should not just be to ensure fairness but also to spur, encourage and create competition. That is why I suggested the Government should take that role back into its own hands instead of having an independent regulator. This would not just be to encourage fairness but to encourage competition, and the Government should grab hold of the opportunity to encourage competition in many other areas.
For example, regulations on taxis should be abolished so that anyone could operate a taxi if he or she put up a disc and passed the safety test. That would introduce competition in the taxi business. Senator Doyle will get annoyed when I say this would be a better option than Dublin Corporation's reaction of suggesting it will solve the problem by appointing wardens to control queues and putting roofs over them so that people do not get wet while waiting 45 minutes, two and a half hours or whatever. The creation of competition in public transport would mean lower prices immediately.
Senator Gibbons mentioned alcohol, which is one of the biggest contributors to inflation. I was surprised to read we are the second largest consumer of beer in Europe – the Czech Republic is the largest. It is clear that increases in the price  of alcohol were a major factor in the recent consumer price index.
A group of supermarkets – I have no vested interest in this – is proposing that outlets with wine licences should be allowed sell beer produced in Ireland. They are not permitted to sell Irish-made products. The Government decided in the recent Intoxicating Liquor Bill not to allow outlets with wine licences to sell beer because it is an Irish product. If this happened, there would be immediate competition and people might be tempted to drink at home rather than in the pub. The Government should do something about this in the Intoxicating Liquor Bill. I know the Leas-Chathaoirleach would not encourage anybody to drink beer. Even at this late stage, the Intoxicating Liquor Bill should be changed to allow more freedom for competition in this area.
I have a vested interest in the repeal of the groceries order. There will be howls of protest from manufacturers saying the grocers will bully them. There will be howls of protest from the grocers who will say the supermarkets will bully them. There will be howls of protest from everybody, but we must face up to this if we are to do something about inflation. We must encourage competition. The groceries order does not only state that one must not sell below cost, it states one must not sell below invoice price which means one could sell at a lower price which would not be below cost. Any grocer opening or renovating a shop cannot ask for a discount or lower price because that would be wrong. However, the law cannot be enforced against companies based in Britain, Germany or the United States – where one large company has threatened to relocate. We must face up to this.
The repeal of the groceries order would encourage grocers to compete on price rather than other areas. They do not always compete on price and place large advertisements in the newspapers instead. That is not in the interests of the public. If we are to face up to inflation we must take unpopular decisions, as the Minister for Finance, Deputy McCreevy, said that Governments must sometimes do.
I will not mention the past, unlike almost every other speaker. I will discuss the two dangers facing us, inflation and the overheating of the economy. If we look back, it should only be to ensure we learn from our mistakes. Senators Gibbons and Ross spoke about measuring inflation on the basis of the CPI. We should not tamper with the map and believe we are changing the territory. Senator Ross referred to the ESRI and said that we should not believe that by tampering with the thermometer we are changing the heat in the room. We could play with the CPI and get it down but tampering with it does not do any good. Creating lasting competition is one solution.
The other solution was mentioned by Senator Ross, that we should question whether growth for all is the most important element. What is the origin of that thinking? From the 1920s to the 1980s our objective was the creation of jobs. We  decided that we had to promote growth to create jobs. However, we are now in a situation where we must question if we want growth. I am not sure if I want growth. An article in one of today's newspapers suggests that people commute from Castlecomer, Gorey, Dundalk and so on to Dublin. However, another article points out the problems this creates for the roads and proposes that the solution is high rise buildings in Dublin for those who want to live close to work. Do we really believe high rise buildings or more roads are the solution? Questioning growth should be high on our agenda. We must ask if we are certain this is the direction we should be taking.
We should be questioning some of these solutions. However, it is more important to ensure that the steps taken by the Government do not overheat the economy. I am concerned about most of the proposals. If they manage to bring down the consumer price index, it will create an overheated economy which will result in many more problems.
I love the way we complain about the problems we have with the euro. The euro has brought us a great deal of success, although I know Senator Ross does not agree. We have a thriving economy and more jobs than we ever had before. There have been huge benefits from many of the steps taken in the past ten years. We must not assume that because the value of the euro is causing a problem with inflation, there is nothing we can do about it.
I know there is nothing we can do about interest rates. How can we gain control of the economy and avoid overheating if we do not have control over interest rates? Almost every suggestion made here will result in the overheating of the economy. We can avoid this by finding other ways of taking purchasing power out of the economy. This is a worthwhile suggestion which I have not heard being made before. If people save money instead of spending it, it has the same effect as taking the money from them in taxes, and is more pleasant. Saving money is not attractive because of the low interest rates and people are not doing it.
Mr. J. Doyle Mr. J. Doyle
Mr. J. Doyle: It almost pays to borrow.
Mr. Quinn Mr. Quinn
Mr. Quinn: Exactly. Given what has happened to the Eircom share price, investment in the stock market is not a guaranteed winner and is unlikely to be an attractive option for many people. However, there are ways for the Government to make saving more attractive, including lower taxation on savings. However, if we are to grasp this nettle and get the overheated economy under control, we should consider a compulsory savings scheme, where a proportion of earnings would not be taken in taxes but put into a savings account for a minimum period. The money would still belong to the people but they could not spend it.
We cannot increase interest rates and we do not want higher taxes, so if we want to control  inflation compulsory savings may be the only way to take purchasing power out of the economy. Almost every other suggestion made here and in the newspapers is a sticking plaster and not long-term. They are in danger of reducing figures by tampering with the CPI. Encouraging saving or making it compulsory would take money out of the economy. It would still belong to the people but would have the benefit of not overheating the economy and combating inflation. I urge the Minister to give this some consideration.
Mr. Costello Mr. Costello
Mr. Costello: I propose to share my time with Senator O'Toole.
Mr. T. Fitzgerald Mr. T. Fitzgerald
Acting Chairman (Mr. T. Fitzgerald): Is that agreed? Agreed.
Mr. Costello Mr. Costello
Mr. Costello: The Minister also wants some time to reply, if we can manage that. I welcome the Minister to the House.
I am glad we are having this debate, for which we have been calling since Christmas. We are concerned on all sides of the House with rising inflation and the threat of overheating in the economy. When the Minister came to this House for the debate on the Appropriation Bill in December, he told us the inflation rate for 1999 was 1.6%. That was a wonderful backdrop to social partnership and to negotiating the Programme for Prosperity and Fairness. However, I have always felt that new programme was to a considerable extent negotiated under false pretences in that there was already a very worrying underlying trend during the last couple of months of 1999 which was not represented in the context of anything that was said in this House by the Minister for Finance or any other Minister. The figure we were left with was 1.6%, a wonderful track record for 1999. By the time the Programme for Prosperity and Fairness was signed in March this year, inflation had risen to 3.9%. Now it has reached 5.2%.
All we have heard from the Minister is the old mantra that although the rate of inflation will increase to 3% or 4% – he acknowledges that it is now over 5% – it will decline in the second half of the year. He has never told us what factors will ensure such a decline. All the prognoses are that inflation will continue to rise. There is no sign that it will decline, unless there is some form of intervention. The Minister for Finance has done nothing in the past six months other than repeat the mantra.
The trade union movement is now putting pressure not just on the Minister for Finance but on the Taoiseach and on the Tánaiste, and now there must be a new approach, otherwise the 5% negotiated for the first year of the programme will be wiped out. I disagree with Senator Ross in relation to social partnership. I am a great believer in it as the way forward. It has a proven track record of delivery of jobs. According the figures the Minister has given us, unemployment was over 16% in 1988. Social partnership came  into existence in 1987. Now unemployment is at 4.5% or thereabouts. That is a wonderful track record. Inflation has also come down over the years. The big danger now is that inflation will reverse or wipe out all the good that has been created by social partnership. Social partnership is not the problem, it has been very largely the cure, and I want to see it continue.
Many factors have been mentioned. I will not go through them again except to say that there are external factors, namely the euro and oil prices, and internal factors such as tobacco and alcohol prices, mortgage interest rates and house prices that are feeding into inflation. I can anticipate the responses to that. I do not want to go through those responses in any great detail because I do not want to take up valuable time.
I would like to concentrate for a moment on making suggestions about what went wrong and how it can be rectified. I blame the Minister for Finance. In three budgets he has done one thing – skewed tax breaks and wage increases in favour of those who already have good spending power. That is the kernel of the problem. Where is spending concentrated as a result of that? Broadly speaking, that spending goes out of the country. It goes on the cars that are congesting our city. The huge increase in the number of new cars purchased in the past couple of years means a huge increase in petrol consumption, and every gallon of that must be imported against a background of disproportionate exchange rates between the punt, the euro, the dollar, the yen and so on. We are losing out through the purchase of luxury goods by those who are already well off.
This has a knock-on effect in relation also to other goods such as tobacco which is also totally imported. More tobacco is consumed, and more alcohol. There is also an increased demand for housing, to which I will refer in a moment. Senator Quinn suggested that we should perhaps reduce purchasing power. I would not agree with that. Purchasing power should be adjusted in favour those who do not have it at present, those who are poor, those who are in need of child care services, those who are on the minimum wage and those who are on low incomes. They will not be buying luxury consumer goods. We saw the figures from Barnardos and the OECD last week which indicated that a quarter of our children are still living in poverty. The Minister can put as much money as he likes into that area and not increase inflation. However, if he gives it to people who are already on high incomes, he will increase inflation because they will spend it on externally produced luxury goods. I hope the Minister will take that into consideration in preparing his budget for next year.
The second area of major concern for me is the huge multinational sector which has created an unreal economy here. More than 50% of our manufacturing output is from the multinational sector. This sector has grown at an alarming rate.  It is wonderful in terms of the tax it brings in, but it makes us very vulnerable. It also means that we very often have tax receipts which are not properly invoiced to our Exchequer because of our low tax rate. In a sense we have an artificial economy that is fuelled by multinationals and which could collapse at any time. We are in very great danger from that sector. I want to see a huge amount of extra resources put into shifting our economy towards the indigenous sector, enabling us to generate the manufacturing output which is currently being provided by the multinational sector because we are a suitable location.
In the context of competition, also raised by Senator Quinn, we should immediately deregulate public house licences. Why should the licensed trade be different from others? Senator Quinn spoke about deregulating the taxi market, but the taxi market is not contributing to anti-competition to anything like the extent that public houses are. Prices are estimated to be 40% in excess of a fair price. There are not nearly enough public houses in urban areas. All we are doing in the Intoxicating Liquor Bill is providing for licences from rural areas to be used in an urban setting. We need to do far more than that.
We have a housing monopoly, and that is the biggest area fuelling inflation. The price of houses is incredible. The CPI relates only to mortgage interest rates. The impact of housing in terms of skewing the market and creating inflation is huge. In Dublin there is a monopoly of eight developers who own 80% of the land, and they decide when zoned land will come into production. While the Minister said local authorities are not providing resources or servicing land, the problem as I see it is that developers are controlling access to and supply of land.
On the question of employment, we must widen our scope in dealing with it. We have discussed the issue of asylum seekers, about 1,000 of whom arrive every month. In central Europe there are many people who would love to come into our labour market as economic refugees, as our citizens were in the past. We should be much more flexible regarding our labour market. We should not allow bottlenecks caused by lack of supply in the workforce. It would be very easy, with a degree of regulation and organisation, to provide a much greater labour pool than currently exists.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: I thank the Minister for his very perceptive opening comments which were spot on. It is amazing that Senator Ross can offer half solutions to problems. Inflation concerns all the social partners, and business, trade unions, the voluntary and community sector and the Government have a duty to come together to try to deal with it. It is too easy for people in both Houses to automatically blame the Government. I will blame the Government if it does not take appropriate action, but the PPF is predicated on three fundamental issues, namely, that economic growth be higher than 5.6% per year, that the  budget surplus be maintained and that fiscal policy should ensure low inflation. We are way ahead of target on the first issue and are also way ahead of target and expectations on the second issue, with a possible surplus of £3 billion this year. However, things are twice as bad as expected on the third issue because people were expecting a rate of inflation between 2.5% and 3.5%. That is a disaster, but is not necessarily the end of the PPF which is structured in such a way as to cope with it. The programme is written precisely in terms of how to deal with problems. We are currently addressing those problems, which can be dealt with.
There are immediate and longer term approaches to inflation. I do not disagree with the points made by Senators Ross and Quinn about the importance of taking medium-term action. However, there is an expectation among workers throughout the country in terms of the value of the increases they will receive this year. If inflation is maintained at the current level, the value for money they expected will be eroded by the time they receive their increases, which are mainly due on 1 October. That is an issue for those who had expectations, who voted for the programme and who are entitled to get value for money.
I was appalled to hear Senator Ross talking about a wage free for all, where people would return to the old spiral of trade unions asking for increases in order to compensate for high inflation. If that happens, as it might, it will signal the end of the PPF. We were through all that in the 1980s when workers got one increase after another and finished up being about 7% worse off by the end of the decade in real terms than at the beginning. I do not want members of my union, other unions or families to have to again face that reality. If we reach the stage where we have to compensate for inflation by submitting wage claims, which might happen, the game will be over.
In the meantime we must take stock of things. The most extraordinary proposal by Senator Ross was his suggestion that after suffering two years of pain, which resulted in the decrease in the value of the euro, we should leave the euro zone, hang our coat on sterling and start the pain all over again.
Mr. Ross Mr. Ross
Mr. Ross: I never said anything of the sort.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: Of course the Senator did.
Mr. Ross Mr. Ross
Mr. Ross: I wish to put on record that I told that to Senator O'Toole privately and that he said he was going to say it anyway. That is the most dishonest thing I have ever heard said in the House.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: Senator Ross has been saying that all week.
We need to examine a number of things in terms of the current rate of inflation. The  increase in the price of alcohol accounts for 1.2% of the current rate of 5.2%. Therefore, if there was no increase the rate of inflation would be 4%. The same can be said of the cost of oil. Senator Ross asked why the increase in the price of oil does not impact on the rest of the euro zone. However, the increase has the same impact on other EU countries where it accounts for 0.6% of the rate of inflation. We can compensate by reducing the excise duty on oil in order to offset the increase. A prices order on drink and a reduction in the excise duty on oil would immediately reduce inflation from the current level of 5.2% to approximately 3.2%, bringing us back into the ball game.
What effect would this have in the future? Rather than messing with the thermometer this would turn off the heat because by the end of the year other factors will have come into play. For example, almost 0.9% of inflation is caused by the increase in the price of tobacco, which will be factored out of the equation by December this year, immediately reducing the rate by 1%. Similarly, the increase in interest rates over the course of the year currently accounts for 0.6% of the rate of inflation. This will also be factored out by the end of the year, though there may be other marginal movements in interest rates but not to the extent we have seen recently.
The euro has hardened from 89 cents to 95 cents or 96 cents, an improvement of about 6%.
Mr. Ross Mr. Ross
Mr. Ross: It is an improvement of 3%.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: It is an improvement of about—
Mr. Ross Mr. Ross
Mr. Ross: Never mind, it is only 2% out.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: That is an improvement of approximately 6%, and this must also be taken into account.
People say that putting money into the economy creates inflation. The flow chart is simple – there is growth in the economy with more money creating more demand and increased demand hiking up prices when not met by supply. How can we deal with this? Senator Quinn put forward one proposal which would work in textbook terms, namely, to take money out of the economy, not through taxation but through saving. No doubt that would work, but we are at an all time high in terms of the amount of money being saved by ordinary punters through investments.
Mr. Ross Mr. Ross
Mr. Ross: And borrowings.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: Investments is what we are discussing. However, there is another way, although Senators Ross and Quinn may not be too keen on it. Taking money out of the economy does not mean taking a couple of pounds from the punters at the bottom of the line. We could also take it out in bulk to increase profits, corporation and capital gains tax, which would have precisely the  same effect. I would like the Government to bring forward a package of measures—
Mr. Ross Mr. Ross
Mr. Ross: He could kill the entire international industry in one minute.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: —which would allow it—
Mr. M. Smith Mr. M. Smith
Mr. M. Smith: The Senator should not be so hard on Senator Ross, he should give Senator Ross a break.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: —take immediate and medium-term action, which is what is required. It is important that people who had expectations in terms of value for money receive it. It is also important for the Government to do its own thing on this issue and not be swayed by people such as Senator Ross who have no solutions to offer and who stand here and take the easy option.
Mr. Ross Mr. Ross
Mr. Ross: Out with Microsoft. Out with Intel.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: They are never put in the situation of having to make a decision. His worst nightmare would be to be put around the table and asked, “Well, Senator Ross, what would you like to do about this?” We can be assured of one thing, namely, that Senator Ross will have no solutions because it is much easier to speak here or to write in the Sunday Independent and have a go at everybody in colourful and extraordinarily good prose, which I enjoy. I do not believe any of it, but I enjoy it – I am entertained rather than informed by it. I know what the tactics are and I hope he continues for a long time – he is filling a very good space in that sense. However, it is important to recognise that he certainly is not offering solutions. The rest of us put ourselves on the line, say how things should be addressed and what we would like to see done, and stake our reputations on it.
The PPF can work if the Government takes action, and Senator Ross is correct in saying the action outlined here does not go far enough.
Mr. Ross Mr. Ross
Mr. Ross: I was wrong. I do not even know what he said but I was wrong.
An Leas-Chathaoirleach An Leas-Chathaoirleach
An Leas-Chathaoirleach: Now that we are on top I must bring the debate to a conclusion.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: The Leas-Chathaoirleach and I have the interests of the State at heart rather than selling more copies of the Sunday Independent. I thank the Minister for his attendance.
An Leas-Chathaoirleach An Leas-Chathaoirleach
An Leas-Chathaoirleach: I am sorry there is disagreement on the Independent benches.
Mr. O'Toole Mr. O'Toole
Mr. O'Toole: I hope the Government will take action on this issue. Workers are depending on it to do so.
Seanad Éireann 163 Inflation Rate: Statements.