Madam, - Paul Sweeney seems to attribute Irish price inflation largely to indirect taxes and charges (Business This Week, February 17th). There is also an allegation that the Government's policy of low direct tax has led to a heavier burden of indirect taxation than in the past.
In fact, the opposite is the case as the following facts show:
1. Indirect taxes (VAT, Customs and Excise) currently account for around 45 per cent of tax revenue, whereas the corresponding figure in 1975 was 55 per cent. In 1985 it was 50 per cent and in 1995 it was 46 per cent.
2. Between January 1997 and January 2006 the Consumer Price Index rose by 33.3 per cent. Excluding indirect taxes, the tax-free index, as published by the Central Statistics Office, rose by 28 per cent in the same period. Thus the contribution of indirect taxes is not the major factor in inflation.
Inflation in Ireland at the moment is largely service price inflation. This reflects increased demand in the economy resulting in higher wages generally in that sector. Indirect taxes have not been increased in the past two Budgets, thus keeping down the level of retail prices.
To the extent that the Government must increase tax and charges this helps meet the increased cost of public services, most of which is represented by higher wages and salaries. To this extent, increases in indirect tax are a symptom of wage inflation in the economy.
There are many factors at work in overall price inflation - the euro exchange rate and import prices, on the external side, and wages, profits and the degree of competition in the economy, on the domestic side. Isolating the Government contribution does not stand up to analysis in such a context.
The article concludes by warning that external factors such as exchange rates and oil prices could raise price levels, as could indirect tax increases. Quite remarkably this leaves out the one key element in domestic price increases especially in the services sector - wage inflation - and ascribes all the responsibility to others. Granted, wage inflation in line with productivity increases should not increase prices, but to leave the wage factor out entirely does not make sense.
I hope these comments will help add balance to the debate. We all have to work together to combat inflation. The more competitive and productive we can make our economy, the less the consumer will have to pay to enjoy the benefits of living in such an economy. - Yours, etc,
JOHN CONLON, Press Officer, Department of Finance, Upper Merrion Street, Dublin 2.