Wednesday, 18 October 2006
Question 83: To ask the Minister for Finance if he is satisfied that the pricing of services provided or regulated by Government is contributing adequately to containing price pressures in the economy; and if he will make a statement on the matter. [33447/06]
The annual rate of consumer price index, CPI, inflation was 4% in September, down from 4.5% in August.
However, a better measure of underlying inflation is the EU-comparable measure of inflation, the harmonised index of consumer prices, HICP. The HICP differs from the CPI in coverage. The most notable difference relates to the exclusion of mortgage interest repayments from the EU-related measure. Annual HICP inflation in Ireland was 2.2% in September, down from 3.2% in August. I welcome the reduction in inflation in September and remain committed to further restraining inflation.
When discussing inflation, it is important first to point out that the recent pick-up was largely owing to external developments over which the Government has no direct control, namely, higher oil prices and increased interest rates by the European Central Bank. Therefore, when we focus on inflation, we must concentrate on areas that can be influenced domestically. Annual services sector inflation is currently running at 7.5% and that is a cause for concern. That highlights the need for more competition in the economy as well as pay and profit restraint in all sectors to keep our cost base down.
Tackling the problem requires a response from all sections of society, not just the Government, as many of the domestic driving forces of inflation are outside its control. The Government is taking action in areas that it can influence. Thus, there is no value in bemoaning the need for fuel rises when those reflect changes in the world price at which commodities are bought or contracted for, such as the price of energy in the case of gas and electricity.
Where we can, we should take action to contain inflation by implementing responsible fiscal policies. For example, excise duties have not been increased in the past two years and the Government has removed the groceries order, which should in time lead to greater price competition. I understand that my colleague, the Minister for the Environment, Heritage and Local Government, Deputy Roche, specifically requested that, to support competitiveness in the economy and to protect the interests of communities, local authorities exercise restraint in setting increases in commercial rates and local charges for the year. The Government is also investing in public infrastructure, which will enhance our ability to produce more goods and services more efficiently and therefore help keep inflation down on a continuing basis.
To the extent that the prices of Government services reflect increased wage cost factors, the effort must be to make the provision of services more efficient. That is what we are seeking to do in modernising the public service. I am confident that over the course of next year inflation will moderate as the impact of higher oil prices falls out of the annual comparison.
Is the Minister aware that if one takes a five-year perspective from the end of 2001, when the current CPI was constructed, to the present day, looking only at Government services, one sees that the increase in their price has been 52%? By contrast, the cost of private services, which pay the same wage costs and endure the same environment, has increased by only 18%. Government service price increases have been three times more than private increases. That belies the Minister's suggestion that international factors are influencing Ireland's deterioration.
If the Minister considers the European comparison that he quotes, he will see what is happening in Ireland with prices largely determined by the Government. We have 60% higher inflation in such services than in the rest of the EU. It is not true that these problems are largely outside our control. Government pricing in all those areas — electricity, gas, health insurance, bus, rail, motor tax, bin charges, post, college registration, the drugs refund scheme, parking fees, TV licences, hospital charges and credit card duties have been the drivers of much recent inflation. Does he agree we must address those?
I do not agree that the weightings applied to such services in the overall basket are the drivers. The main drivers for inflation have been international factors such as the European Central Bank's interest rate rises over the past year and the increase in energy prices. The Deputy contends that the Government has been the main driver. If one considers the position between January 1997 and September 2006, the constant tax price index published by the CSO, a measure that excludes the impact of changes in indirect taxes on the CPI, shows inflation of approximately 33%. The full CPI, including the impact of indirect taxes, rose by approximately 39% over the same period, indicating that taxation has only a marginal impact on overall inflation.
It should be noted regarding the inflation in health and education to which the Deputy refers that those sectors have relatively small weight in the basket of consumer goods and services, meaning that their impact on overall inflation is relatively low. Factors that influence health inflation, such as doctors' and dentists' fees, are outside Government control. The gas and electricity sectors have regulators and increases in recent years largely reflect the global increase in oil prices, something over which we have no control. The oil price increase is not exclusive to Ireland since all oil importing countries are similarly affected. The impact on competitiveness will ultimately depend on how we respond.
Our long-term strategy continually to reposition the economy towards the production of more knowledge-intensive goods and services, which tend to be less energy-intensive, should help reduce our exposure to international energy price developments. The impact of higher energy prices on the economy will ultimately be a function of how economic agents, including policymakers, react. Higher energy prices have resulted in higher wage demands and increased public spending, which have a detrimental impact on economic performance. There is now greater awareness that we cannot compensate ourselves for those increases.
On local authority rates, the 1993 rates contributed 17% of total local authority income. Today the figure is closer to 12.5%. The Minister sought, in the adoption of budgets for this year, to have local authorities ensure that any increase in commercial rates and local charges took account of the impact on competitiveness in the economy generally. The response to that request was positive and to a large extent local authorities exercised significant restraint, with increases generally of a lower order than in previous years.
Does the Minister agree that the two VAT increases he implemented in 2002 have added approximately €714 million to his revenue, equivalent to approximately €500 per family? Does he further agree that the cost increases I outlined have added approximately €3,000 in extra costs for a consumer or family affected by them? Therefore, the Minister's suggestion that these are insignificant in terms of a family's spending is unrealistic. The implication of Government pricing decisions amounts to €3,500 extra for many families.
I do not know the basis on which the Deputy drew up those statistics and would have to examine how he did it before I could give a detailed answer. However, in the context of water charges, for example, water pricing policy now requires direct recovery of all non-domestic water service costs and certain areas reflect the coming on stream of major new schemes. The national non-domestic metering programme will facilitate a more transparent system of recovering water service costs where local authorities were not recovering full costs in that area.
I am making the point that there is a need for more transparency in all of these matters. In the past there was much cross-subsidisation with regard to cost recovery models and we must deal with that issue.
I am not talking about introducing them. Waste management costs reflect the polluter pays principle, higher environmental standards, the need for additional infrastructure and the fact that we must get a full cost recovery method for both public and private services. Public services have recovery costs of just 80% of private services recovery. Therefore, there is still some way to go.