The threat posed to the economy and to living standards by inflation has been belatedly recognised by the Department of Finance in its Economic Review and Outlook for 2000. Having predicted an inflation rate of 3 per cent in last December's Budget, the Minister for Finance, Mr McCreevy, has been forced to revise that estimate upwards to 5.25 per cent for the year. Even then, the new estimate is likely to be on the low side because it is based on assumptions that oil prices, along with interest and exchange rates, will remain unchanged for the remainder of the year. Given the continuing weakness of the Euro and pressure on the European Central Bank to raise rates, such an assumption would appear to be unreliable.
As on previous occasions, the Department appears to have erred on the side of caution. While revising estimates for economic growth and Government taxation upwards for the year, the figures may still fall short. At the same time, the bad news surrounding rising inflation has been minimised. Such an approach is understandable, given the various pressures involved. The review recognises the Programme for Prosperity and Fairness as being essential in providing a stable foundation for continued economic growth. And, without referring directly to the upcoming review of its terms it urges that any tax and welfare changes should not add unduly to demand in the economy. At the same time, it says, public expenditure policy should retain an appropriate balance between supply and demand.
Taken in conjunction with this week's review of the construction industry by the Department of the Environment which found it to be operating at full capacity, with escalating tender prices, the situation is serious. The Minister, Mr Noel Dempsey, spoke of the possible postponement or abandonment of necessary infrastructural projects identified by the National Development Plan. Should that happen, worsening bottlenecks could choke off growth and, in a worst-case scenario, lead to a hard economic landing. The review acknowledges substantial increases in house prices, along with rising general inflation, as signs of an overheating economy. It regards services inflation as "very high", currently running at 7 per cent compared to 4.7 per cent in 1999. Irish costs are rising much faster than those of our main trading partners and the review predicts a loss of competitiveness in Euro-area markets despite faster productivity growth. However, investment levels are such that further strong growth, at more modest levels, is forecast over the coming years.
In spite of the inflationary trend, there are positive elements in the report. The economy continues to power ahead with a predicted GNP growth rate of 8.3 per cent for 2000. At the same time, a further 75,000 people are likely to be at work by the end of the year, bringing the unemployment rate down to 4.5 per cent. Exports are predicted to rise by 15.6 per cent, with imports increasing by 14.7 per cent. This spectacular growth is reflected in bulging State coffers. Revenue receipts are now likely to grow by 14.5 per cent, up from 9.6 per cent, giving Mr McCreevy a further £650 million to spend. But money alone will not solve our difficulties. Inflation must be brought under control and the Programme for Prosperity and Fairness protected.