The Government will favour deregulation and competition law over price controls to reduce inflation, writes Mark Brennock, Political Correspondent.
We have the second highest cost of living in the euro zone. Inflation remains a substantial threat to the stability of the public finances. The rate of price rises has now become a major political issue and ministers are considering a number of measures to keep prices down.
The current dominance of the liberal free market economic model means that no government will consider the old way of imposing maximum price controls on products.
In the 1970s, a small army of civil servants monitored prices of all sorts of goods around the State, and advised on the imposition of price controls on those seen to be taking excessive profits.
But now the only price controls in force are the grocery orders designed to prevent below-cost selling. Deregulation, the reduction of indirect taxes and the promotion of competition are seen as the only realistic tools to combat inflation.
But every regulation and indirect tax condemned by free marketeers as keeping prices high is defended by others as serving some social function.
For example, retail planning guidelines, which put a cap on the size of "superstore" developments, are designed to prevent massive retail outlets from sucking the life out of town centres. But they are also a brake on competition, and may prevent the emergence of outlets whose scale allows them to lower prices.
Ireland's Vehicle Registration Tax (VRT) gives us among the highest priced cars in Europe. However, at a time when the roads are choked with cars anyway, would it be wise to cut VRT?
Indirect taxes - VAT and excise duty - keep prices high. But higher indirect taxes have allowed the Government pursue other taxation policy objectives.
Income tax cuts have given Irish people the third highest after tax income per capita in Europe, behind only France and Luxembourg. If indirect taxes are cut, either direct taxes must rise or services must be cut.
The Government is now likely to look at areas of the economy where deregulation could reduce prices. The deregulation of the Dublin taxi industry has greatly increased the supply of taxis (prices are set by order and so are unaffected).
The Forfás report points in particular to a sharp rise in prescription costs, something which the Government hopes the recent deregulation of pharmacies will tackle. The easier it is to open a pharmacy, the more price competition there will be, the argument goes.
So deregulation will be pursued in some, but not all, areas. The professions - where price rises were particularly notable around the time of the euro changeover - are in the sights of the advocates of deregulation and the promotion of competition.
The Competition Authority is examining professional fees, which rose significantly around the time of the euro changeover. They are examining restrictions on entry to professions to determine whether these restrictions prevent real price competition.
In the dying days of the last government, the Oireachtas passed legislation strengthening the Competition Authority. The watchdog body now has greater powers of investigation and has gardaí attached to it to help uncover and punish anti-competitive practices. The fines that can be imposed on those guilty of such practices have been increased, as has the power to enforce competition and prevent collusion.
Although the Forfás report finds no evidence of profiteering from the euro changeover in most sectors, professional fees were an exception. Dentists, opticians, doctors and others increased their charges significantly at this time. Other services such as cinemas and theatres, pubs, restaurants, catering, accommodation and hairdressing also imposed big price rises.
It is notable that those who saw the need to ratchet up prices were all in areas that do not face competition from abroad. They are what economists call "sheltered services".
But there is nothing too surprising about the disproportionate price rises in the services sector. As a people, we are now better paid and better off. Employers in the traditionally low-paid services sectors have had to pay higher wages to keep their staff, but this has not been accompanied by higher productivity. For example, hairdressers are earning significantly more than they did 10 or 15 years ago. But they are still doing the same number of haircuts per hour. The result is that it costs more to get a haircut.
In addition, labour shortages in the services sector have driven prices up, as anyone who has sought to hire an electrician or plumber in recent years has discovered.
The Tánaiste, Ms Harney, told the Dáil last week she had an "open mind" on what measures should be used to curb price rises. The Forfás report and the awaited Competition Authority report on the professions will provide the hard information on which decisions will be based. But the Tánaiste signalled that some action was now likely. "We must take whatever measures are necessary to keep prices down and increase competition", she said.