Alarm bells should be ringing for the Minister for Finance, Mr McCreevy, and the Government because unacceptably high rates of inflation have become embedded in the economy.
For more than two years now, Irish inflation levels have been running at more than four per cent - double that of the great majority of our European partners and competitiveness is being eroded. Figures for the year to the end of May show a marginal decline in the rate of inflation to 4.7 per cent, compared to 4.8 per cent for the twelve months to April. But, when EU comparisons are made, we are out of line with the major economies. And our inflation rate is almost four times that of our largest trading partner, the United Kingdom.
The Central Bank has consistently sought corrective action over the past eighteen months, but the message did not seem to get through to the Government. Now that the general election is over, that may change. The need for action is particularly acute because the rapid appreciation in the value of the euro against both the dollar and sterling has the capacity to deliver a sharp knock to our export-led economy. Interest rates are expected to rise in the euro zone. And yesterday's volatility on world stock markets only serves to underline the tenuous nature of economic recovery and adds to the concerns of industry.
The deputy leader of Fine Gael, Mr Richard Bruton, yesterday identified mismanagement of the public finances as one of the most significant sources of inflation, with spending racing ahead of revenue. A report on the benchmarking process dealing with public-sector pay and reform, due later this month, will add to the difficulties. The Taoiseach, Mr Ahern, regards the exercise as a stepping stone towards a new national agreement, but the private sector is distinctly wary of the idea because of the possible costs involved.
Employment in the economy is still rising, but in a very uneven manner. The number of people working in the construction industry grew by less than 2 per cent in the past twelve months while, in the last quarter, employment in manufacturing actually fell. The public sector has bucked that trend, growing by 6.5 per cent. In the same way, while wages in the private sector began to moderate as unemployment increased during the past nine months, pay increases in the public sector continued in double-digit figures.
Earlier this week, Mr McCreevy told his Cabinet colleagues that public-sector pay was now a priority and every Department would have to control spending. Public expenditure accelerated to 27 per cent in the first five months of this year, compared to a revised Government target of 14.5 per cent. Because of that, the Government may be forced to abandon some of its election promises and freeze the intake of employees in certain areas. There are difficult times ahead.