The Government has the power to curb inflation by cutting excise duties, but it is too complacent, writes Manus O'Riordan.
I don't wish to quibble with the Minister for Finance's statement that "any sense of complacency is an especially serious threat, but so is a lack of proportion" (Opinion, July 13th).
But it is when I read of the Minister going to Brussels on July 11th in order to intone in French the rhetorical question, "what is the problem?", that I begin to have some doubts. For it seems to me that an unacceptable degree of complacency has set in just because the year-on-year rate of inflation for June has been "held" at 3.9 per cent.
Once the effects of further interest rate increases take hold, as well as the ESB and gas price increases that are in the pipeline, the realistic prospect is for a further acceleration in that rate of inflation in the coming months.
For the past two months Siptu has been pointing out that the year-on-year rate is in fact heading towards 4.5 per cent by the end of the year, leaving average inflation for the year as a whole as close to 3.9 per cent as makes no difference.
These were precisely the inflation projections that Siptu insisted all parties needed to take on board during the recent pay talks. And this is why Siptu insisted on securing an agreement that would ensure wage rates in 2006 remained ahead of such a rate of inflation, to the extent of providing for an increase in their real value of at least 1.2 per cent.
Other economic forecasters have now come close to agreeing with Siptu's projections.
The Friends First Quarterly Economic Outlook published on July 12th also expects year-on-year inflation to hit 4.5 per cent by the end of the year and to average 3.8 per cent for this year as a whole, before decelerating to an average of 3 per cent next year. All this is a far cry from the Government's forecast in Budget 2006 that inflation would only average 2.7 per cent this year before easing back to 2.5 per cent in 2007.
It is therefore just not good enough for the Taoiseach to smugly offer the "explanation" that inflation is "on the rise because probably the boom times are getting even more boomer".
It is incumbent upon the Government to arrest emerging inflationary expectations by rolling back on that rate, and by doing so decisively. Is it not capable of learning some lessons from the not-so-distant past?
It is indeed far too complacent a Government reflex to sit back and do nothing, on the grounds that since economic forecasters now predict that the average rate of inflation can be brought back to 3 per cent next year, there is little problem with it heading first towards a year-on-year rate of 4.5 per cent. I would argue that it is far more preferable to take the appropriate action that will begin to reverse such a rise from the word go.
In late 2000 the rate of inflation had also been on an upward spiral, peaking at 7 per cent that November.
Eventually responding to months of sustained pressure from Siptu, the Government at long last took dramatic action that December, in Budget 2001, with an overnight reduction in excise duties on motor fuels, at a cost equivalent to €195 million in present-day terms. At that juncture, motor fuel price inflation was 19.2 per cent, or almost three times the overall rate of inflation, while indirect taxes were responsible for 1.6 percentage points of that 7 per cent inflation rate.
The Budget's decisive action immediately reduced the indirect taxation contribution to 0.6 per cent, and brought the December rate of inflation back down to 5.9 per cent.
The present rate of 16.5 per cent petrol price inflation amounts to more than four times that of the consumer price index as a whole. It therefore constitutes a relatively more onerous burden than that of six years ago in terms of its adverse effect on the living standards of people forced to commute long distances to and from work, as well as to whatever childminding facilities they can find.
Yet by once again acting decisively to cut excise duties on motor fuels, and by effectively policing that reduction at the petrol pumps themselves, the Government could at a stroke eliminate indirect taxation's 0.5 percentage point contribution to the current rate of inflation and correspondingly reverse that increasing rate.
The Government also has the necessary wherewithal to do so. Quite apart from the €1 billion Budget surplus that the Minister for Finance is now so confidently predicting, the concentration of media commentary on the increased revenue from a buoyant property market has overlooked the fact that the Government's revenue from excise duties is also coming in at a faster rate than expected.
The Budget projection was for a full-year increase of €257 million, or 4.9 per cent above last year's figures. But in the first half of this year excise duties are already €211 million above their take for the equivalent period to June 2005, representing an increase of 8.3 per cent.
By taking early action on excise duties the Government can knock half a percentage point off the rate of inflation, instead of ineffectually remaining content with the maxim that the situation must get worse before it gets better.
Manus O'Riordan is chief economist at Siptu