Economics: Indirect taxes and charges plus trade with non-euro countries continuing to drive prices to high levels.
While inflation is not rising as fast as it was, people still complain about the cost of living. They are correct. The level of prices in Ireland is a massive 23.1 per cent above the average in the rest of the European Union.
This is the official figure from Eurostat, the EU's statistical office, in its international comparison of price levels. The level of prices in Ireland was the second highest in the EU in 2004, next after Denmark at 137, where the EU25 is equal to 100, as the graph shows. It was just above Finland at 22.9 per cent. The graph shows that the "Old Europe" countries also have higher prices than the EU average. However, these countries all have far better social systems than Ireland. We have high prices for consumer goods and we also have to pay out a lot more in cash for health services, welfare and public transport.
When the price level in Ireland is compared to the original 15 countries, we are still among the highest cost-burdened, but we are "only" 16.3 per cent above that average. This is because the price levels in Old Europe are much higher than in the accession countries.
There are two reasons why prices are much higher in Ireland than in most of Europe. First, the rise in the value of the euro affected our prices because Ireland trades more with non-euro countries. The other reason was the Government's pursuit of its low direct tax policy (income tax and corporation tax), which was accompanied by heavier taxes on spending and higher administrative taxes. ("Administrative taxes" include local charges, bus fares, hospital charges, road tolls, parking charges, gas and electricity, etc).
The high levels of indirect taxes alone boosted Ireland's high inflation by almost one quarter in the five years to early 2004. In that period, Irish prices, ably assisted by Government tax policy, rose at double the rate of the average increase in the EU. This contributed to the high levels of prices in Ireland today.
The good news is that the Government has stopped piling on rises on prices through indirect taxes since Charlie McCreevy left, though the other stealth taxes in charges are still rising. Unlike income tax, indirect taxes and administrative charges are regressive - they do not take account of ability to pay.
The level of prices in Ireland has reduced from 26.6 per cent above the EU25 level in 2003 to 23.1 per cent in 2004 (though it also fell in Denmark). This is moving in the right direction for the first time in some years. Irish prices will have to grow more slowly than the average in Europe if the overall price level is to be reduced from its current high level.
However, there are three obstacles to achieving this. First, the Government could again decide to impose high taxes on spending and even more charges negating increases under any new agreement. With a booming economy and many tax loopholes yet to be closed, such moves should be unnecessary. A firm commitment not to impose further stealth taxes would be welcomed by consumers and trade unionists.
Secondly, if the dollar falls rapidly, as most economists predict, it will push up our inflation rate. Thirdly, the price of oil is unlikely to fall and could rise again, though this will impact on all oil-importing countries.
A major advantage of national agreements is that they avoid any wage/price spiral. In past agreements, workers settled for moderate wage increases in return for tax reductions, but there will be no tax trade-offs, which can subsidise employers, this time. Congress will therefore be seeking improvements in the "social wage" - health, education, modern public transport - as part of the overall improvement in workers' living standards.
An issue which workers constantly raise with union officials is why house prices, which have spiralled upwards, are not included in the Consumer Price Index. The answer is that while interest payment changes are included in the CPI (and they have remained low as house prices have soared), spending on a house is not spending on day-to-day consumption. While consumer prices have risen by 35 per cent over the past 10 years, Irish house prices have risen by a multiple of this. This disparity between the cost of living measured by the CPI and rapidly rising house prices is not taken into account in wage negotiations. Those who own their own homes are unaffected or have gained while younger people have faced real decreases in their living standards, in higher rents or repayments on big loans. The Government policy of subsidising investors with tax breaks has helped push up house prices for many years. The belated termination of this costly and regressive subsidy is welcome, but the programme of affordable housing agreed under Sustaining Progress must be prioritised and accelerated. It is inevitable that house prices will cease to rise in time and consumers may look forward to little or no rises for some years.
It will be a some time before we manage to reduce the overall consumer price level in Ireland to the average in the EU. In the meantime, external factors, such as the exchange rate and oil prices, could adversely affect our already high price levels, but further indirect taxes and charges do not help either.
Paul Sweeney is economic advisor to the Irish Congress of Trade Unions
