Potential Budget increases in the prices of cigarettes and beer are factored into the Government's economic forecasts, according to documents released under the Freedom of Information Act.
The Department of Finance's inflation figure for the year of 5.25 per cent provides for an increase in the price of cigarettes by 10p per packet of 20 in the December Budget and a rise of around 5p in excise duties on a pint of beer, according to the documents.
The increases in excise duty on tobacco announced in the last budget are one of the main drivers of this year's record inflation levels - currently 6.2 per cent. The impact of last year's tax increases will drop out of the Consumer Price Index in December and most analysts have been expecting the Government to refrain from adding to inflationary pressures with fresh increases.
But the Departmental memo indicates that such increases have been contemplated even though the Government is facing demands from the social partners for cuts in excise duties to bring down headline inflation. However, the Minister will not make any decision until closer to Budget Day on December 6th and the memo does not mean he is certain to raise the excise duty rates.
The documents also show that the 5.25 per cent inflation figure published last month in the Department's mid-year economic review is based on a number of extremely optimistic assumptions. The assumptions made in reaching the inflation forecast published in Economic Review and Outlook 2000 include:
Interest rates to remain at 4.25 per cent.
A euro to dollar exchange rate of $0.90 to $0.91.
Crude oil price of $27 per barrel.
No price rises in the most popular alcoholic beverages.
A 5p increase in duty on beer in the Budget. No further increases in the rate of services inflation.
A Budget day increase of 20p on a packet of 20 cigarettes.
The memo, dated June 26th, points out that US bank Goldman Sachs was forecasting that interest rates would rise by 0.5 per cent over the remainder of the year. Since the review was published the European Central Bank has put up rates by 0.25 of a percentage point.
The euro remains under sustained pressure on the foreign exchange markets, trading in the region of $0.86 last Friday. Oil prices are currently in the $34-a-barrel range, but predicted to fall.
A handwritten note on the document indicates the Department itself has doubts about its assumption on services inflation - which reflects the rising cost of wages in industries such as hairdressing and restaurants. "On services we assume that the current rate is maintained (circa 6.7 per cent). This might be optimistic, but we have ignored the positive impact of the Government's `fees and charges' plans," comments one civil servant.
