Joan Burton (Dublin West, Labour)
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Question 105: To ask the Minister for Finance if his attention has been drawn to the recent warning by the Central Bank of the risk posed to the Irish economy and its competitiveness by continued high inflation and its prediction that annual inflation is set to rise to 4.5% in 2007; and if he will make a statement on the matter. [4210/07]

Brian Cowen (Laois-Offaly, Fianna Fail)
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I am aware of the report by the Central Bank and welcome its broadly positive assessment of the Irish economy. The best measure of underlying inflation is the EU comparable measure of inflation, known as the harmonised index of consumer prices. Average HICP inflation in Ireland was 2.7% in 2006 and my Department is forecasting HICP inflation averaging 2.6% in 2007.

The annual rate of inflation as measured by the consumer price index was 4.0% in 2006 and is forecast to be 4.1% in 2007. The CPI differs from the HICP in terms of coverage. The main difference between the CPI and the HICP is the inclusion of mortgage interest repayments in the CPI. Recent CPI inflation has been impacted by six interest rate increases since December 2005, each of 0.25%. I agree with the point expressed by the Central Bank in its bulletin that the outlook for CPI inflation will depend in large part on the future path of interest rates.

Where it can, the Government is taking action to contain inflation by implementing responsible fiscal policies. With the exception of an increase in indirect tax on tobacco in the last budget, which was done for health reasons, indirect taxes have not been raised in the past three budgets. The Government also removed the groceries order and this is beginning to have an impact on food prices. The Minister for the Environment, Heritage and Local Government specifically requested that in order to support competitiveness in the economy and to protect the interests of communities, local authorities should exercise restraint in setting any increases in commercial rates and local charges in their budgets for 2007.

We are also investing heavily in public infrastructure which will enhance our ability to produce more goods and services more efficiently, and that will help keep inflation down. To the extent that the prices of Government services reflect increased wage cost factors, we need to make the provision of the services more efficient. This is what we are seeking to do in modernising the public service.

The stable macro-economic environment created by the Government through the pursuit of sound public finances will support the economy's competitiveness, and will in turn provide the basis for achieving further economic and social policy objectives in the long term.

Joan Burton (Dublin West, Labour)
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Does the Minister appreciate the plight of the ordinary family who must do a week's shopping? The report of the Central Bank shows that Ireland is now the country with the highest level of prices in Europe and in the eurozone. Our price levels are 19.5% higher than the eurozone average. Ireland is significantly more expensive than either the UK or Germany. The Government is the primary party responsible for a great amount of price increases which the people must face. The Euro barometer in which the Minister placed so much faith during his answer showed that the Irish figure is 3% for December. The only country that is higher than Ireland is Greece, which is at 3.2%. We are joint second for the highest price levels with Slovenia, which only recently joined the eurozone.

The family that must do a week's shopping is living in the country with the highest price levels and we are drifting to the top of the inflation league. We are also at the bottom of the competitiveness league in areas like broadband penetration. Does the Minister have any kind of response to the impact of this on families and on the many workers who are getting redundancy notices? Even workers in high-tech jobs at Motorola are losing their jobs. Our competitiveness is simply not keeping pace with that of our competitors. What does the Minister say to that after ten years in Government?

Brian Cowen (Laois-Offaly, Fianna Fail)
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In ten years we have seen unprecedented economic growth, massive employment and relative price stability. Since we have come into the eurozone, there has been a divergence in inflation, which drifted to 3.2% higher than the average at one stage, but came down to zero in 2005 before going back to 0.5% in 2006. There have been recent interest rate increases which have fed into the inflation figure. That is affecting all economies in Europe. There are other issues for which we are not responsible. We cannot direct the cost of crude oil or gas prices as these are regulated sectors in the economy.

The most recent inflation forecasts produced by my Department were published in the budget. The Department forecasts that the CPI will increase marginally to an average of 4.1% this year, before falling to 2.4% next year and 2% in 2009. In the same period for the harmonised index of consumer prices, inflation is forecast to average 2.6% this year, 2% next year and 1.7% in 2009. We have good reasons to believe that the harmonised index inflation will average 2% over the medium to long term in line with the ECB target. Apart from the fact the 2% rate is the ECB's target measure, there are other reasons specific to Ireland which should cause the harmonised index to average around 2% in the future. For example, price levels in Ireland are currently the second highest in the EU. As inflation in Ireland cannot diverge continuously, the rate of inflation can be expected to fall over time, leading to the attainment of an average harmonised index rate of 2%. Demand will not be as strong in the future as the economy moves through a more stable growth phase. As competition increases across the economy, we can expect an easing of inflation. We have a more open labour market, which has already started to reduce wage pressures, particularly in the construction industry.

We have to be vigilant. It seems some of the recent high-profile job losses can be attributed to the fortunes of individual companies, rather than problems with national competitiveness. I am aware of the comments of the various finance houses. It is estimated that in the ten years to 2006, taxation added an average of just 0.5% per annum to the consumer price index. As the health and education sectors, for example, have relatively small weights in the basket of consumer goods and services, their impact on overall inflation is relatively low. Many of the factors which influence health inflation, such as the fees charged by doctors and dentists, are outside the Government's control. The increase in the price of oil is not exclusive to Ireland, as I have said, because all oil-importing countries are similarly affected. Its impact on our competitiveness will ultimately depend on how we respond.

Joan Burton (Dublin West, Labour)
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During the term in office of the Minister, Deputy Cowen, Ireland has performed consistently badly on the European harmonised index of consumer prices, which is compiled by EUROSTAT. Since 1998, prices in Ireland have increased by almost 30%, which is the highest level among EU countries and almost twice as high as the EU average. The nurses' claim, in respect of which they are threatening to go on strike, is partly based on the fact that they can no longer afford to buy houses in the greater Dublin region. They want a Dublin cost of living allowance because it is so expensive to live in this part of the country. The builders, who are the Minister's friends, have not been slow in jacking up house prices. The EUROSTAT figure is lower than the official rate of inflation in Ireland because it does not include the cost of a mortgage for people, particularly young families, who have to spend 25% or more of their net wages on mortgage payments. Can the Minister answer the question he was asked? The Government said in Towards 2016 that it would try to reduce inflation, but what is it actually doing to that end? It is all talk and no action.

Brian Cowen (Laois-Offaly, Fianna Fail)
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It is not all talk and no action, obviously, because we have been experiencing growth rates which are two and half times the EU average. I assure the Deputy that the finance ministers in Germany and France would love to have a little more inflation in their economies, so they could have annual growth rates of 5.3% or 5.4%.

Joan Burton (Dublin West, Labour)
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People can buy houses in France and Germany.

Brian Cowen (Laois-Offaly, Fianna Fail)
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They would love to have more domestic demand in the economy.

Joan Burton (Dublin West, Labour)
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A nurse in France or Germany can afford to buy a house.

Brian Cowen (Laois-Offaly, Fianna Fail)
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Wage increases in Ireland have significantly outstripped inflation. Pensions have increased by 85% in the period mentioned by the Deputy, whereas inflation has been 30%. We would have been waiting a long time to get to that level if pensioners got increases of just £1.50 a week, which is what they were getting the last time the Labour Party was in Government. Under the social partnership agreement, a committee meets to ensure we monitor the position in respect of this matter. Our long-term strategy for responding to higher oil prices involves continually repositioning the economy so it produces more knowledge-intensive goods and services. Such services tend to be less energy intensive, which should help to reduce Ireland's exposure to international energy price developments. The impact on the economy of higher energy prices will ultimately depend on how economic agents, including policy makers, react in such circumstances. In the past, higher energy prices resulted in demands for higher wages. The subsequent increases in public spending had a detrimental effect on our economic performance. We now have a greater awareness that we cannot compensate ourselves for such increases. We intend to increase significantly the productive capacity of the economy by investing an average of 5.4% of funds in the public capital programme each year, thereby ensuring there are no inflationary pressures. This measure will ensure that our growth is not accompanied by the inflationary pressures which would arise if we did not expand the productive sector of the economy. Deputy Burton spoke about builders, who are needed to build houses.

Joan Burton (Dublin West, Labour)
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Can the Minister do something about the manner in which builders engage in land speculation?

Brian Cowen (Laois-Offaly, Fianna Fail)
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I do not know who else the Deputy expects to build houses. The capacity of the construction industry has expanded in recent years, thankfully, so it is now able to meet demand by providing up to 80,000 houses per annum. That contrasts with an annual average of between 30,000 and 35,000 houses when Deputy Burton's party was last in office.

Joan Burton (Dublin West, Labour)
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A nurse could afford to buy a house at that time.

Brian Cowen (Laois-Offaly, Fianna Fail)
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These are all indications of increased capacity.

Joan Burton (Dublin West, Labour)
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Nurses could afford to live in the Dublin area.

Brian Cowen (Laois-Offaly, Fianna Fail)
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Annual house price inflation has decreased to approximately 5% over the last six months.