Tackling inflation must be Cowen's priority

Benchmarking Ireland's Performance, the first volume of the 2006 Report of the National Competitiveness Council, published by…

Benchmarking Ireland's Performance, the first volume of the 2006 Report of the National Competitiveness Council, published by Forfás on Thursday, provides no fewer than 130 measurements of factors relevant to recent Irish economic performance.

This offers us a most comprehensive set of data, drawing as it does upon a wide range of different sources to compare aspects of Ireland's economic situation with other countries with which we compete in world markets.

Our many strengths and our weaknesses both emerge very clearly from these data - to which I shall return in a future column.

However, curiously this report does not identify or display the rapid rise in our inflation rate that has taken place since 1999 - which, of course, is a hugely important factor.

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This has affected our competitiveness, moving us from having been one of the lowest-cost countries in western Europe up almost to the top of the list of high-cost countries.

Between 1999 and 2003 Irish inflation ran at well over twice the rate of the rest of Western Europe. Similarly, whilst during this seven-year period hourly earnings rose by 24 per cent in the EU 15, in Ireland hourly earnings rose by 56 per cent - once again over twice as fast as in the rest of western Europe.

Of course, during this period labour productivity was also rising faster in Ireland than in the rest of the EU 15, but that factor accounted for only half of the disparity in earnings growth. So, our competitiveness relative to our European neighbours has deteriorated sharply.

In the light of this highly disturbing inflation pattern,, it is scarcely surprising that our export performance deteriorated sharply between 2000 and 2005.

As this Competitiveness Report shows, during that period our share of world merchandise trade declined by one-eighth, costing us 5 per cent of the jobs in modern manufacturing and 2 per cent of the jobs in our traditional manufacturing sector.

What was the cause of this serious set-back to our economy?

The answer to this question is absolutely clear. It was government fiscal policy between 1999 and 2002 that created the inflationary pressures which have set our economy back. In the years between 1998 and 2001 the proportion of workers unemployed more than halved, falling from 7.6 per cent to 3.5 per cent as we rapidly approached full employment. For, with 23,000 workers changing jobs each month, a 3.5 per cent unemployment rate was no more than what was needed to give those changing employment time to find another job.

With full employment looming up in the immediate future, any government concerned to avoid inflation and loss of national competitiveness would have been careful during those crucial years to avoid over-stimulating the economy by expanding public spending.

But instead the minister for finance of that period, Charlie McCreevy, chose that precise moment in our economic cycle to introduce not just one but two election budgets. Between 2000 and 2002 these increased current public spending by an incredible 31 per cent.

That gross and irresponsible over-stimulation of the economy in circumstances of full employment - clearly motivated by the most short-term political considerations in advance of the 2002 general election - was of course the factor that precipitated the disastrous inflation that has cost us the competitive edge that we had secured during the Celtic Tiger period from 1993 to 2001.

Of course the damage done between 1999 and 2003 was in no way comparable with the tragedy of a quarter of a century earlier, when irresponsible budgeting trebled the national debt in four years and pushed public borrowing up to a threatened figure of more than 20 per cent of GNP.

The more recent inflation created by public overspending at the start of the current decade, at the very moment when our economy was achieving full employment for the first time in its history, damaged, but did not this time destroy, our economy.

However, we cannot now afford any further erosion of our impaired ability to compete in world markets, and it is disturbing to observe that during the current year we have once again started to lose ground in relation to inflation.

After two recent years - 2004 and 2005 - when we once again came near to holding our ground vis-a-vis our EU partners in relation to inflation, this year prices here have been rising at a rate that is about three-quarters higher than in the rest of Western Europe.

Tackling this renewed threat to our remaining competitiveness must be the determining factor in the budget which Brian Cowen will be presenting to the Dáil in about five weeks time.

Unfortunately, much current media comment is ignoring entirely this crucial economic dimension of the budget.

We read and hear a good deal of economically irrelevant comment about the Minister having lots of money to "give away" in what is widely seen as likely to be another election budget.

Yes: our finances are currently in good shape, and there will of course be room for some additional spending next year, but Brian Cowen is well aware that in economic terms this budget needs to be "neutral" - that is to say one that will not further boost inflation in an economy in which prices are once again rising at a most disturbing rate.

That is the issue upon which our media should be concentrating in the weeks ahead, with a view to assisting our Minister for Finance to hold the line against irresponsible political pressures from some of his political colleagues.