Tuesday, 20 March 2007
Question 89: To ask the Minister for Finance if he has assessed the contributions from different sectors to consumer price growth in the past five years; and the implications this has for Government policy. [10196/07]
My Department assesses data produced by the Central Statistics Office on the contribution from different sectors to price growth. The CSO rebased in December 2001. The figures for the years 2002-06 show that consumer price inflation increased by approximately 12.5% over this period. Of this figure, it is estimated that approximately 10% is due to services sector price inflation, while 2.5% is due to goods inflation. It is important to note, however, that during this time the economy grew by 22% and 260,000 jobs were created.
Where it can, the Government is taking action to contain inflation by implementing responsible fiscal policies. For example, with the exception of an increase in indirect tax on tobacco in the 2007 budget, which was done for health reasons, indirect taxes have not been raised in the past three budgets. We have also reformed sectors such as the communications and insurance sectors and these are now showing low rates of inflation. The Government also removed the groceries order and data recently released by the Central Statistics Office show that this is beginning to have a moderating impact on food prices. I understand that the Minister for the Environment, Heritage and Local Government specifically requested that to support competitiveness in the economy and protect the interests of communities. Local authorities should exercise restraint in setting any increases in commercial rates and local charges in the context of their budgets for 2007.
We must also be aware that a number of important factors which influence inflation are outside Government control. For example, mortgage interest rates are set by the European Central Bank and mortgage interest added in the region of 2% to total CPI. Equally, energy prices in Ireland are set by independent regulators and reflect international market prices and other factors such as investment costs.
Goods are generally traded internationally and, as a result, goods inflation is kept low by international competition. However, services are largely non-tradable and the relatively high rate of services sector inflation is a cause for concern. The Competition Authority is undertaking a number of detailed studies of how competition is operating in specific sectors of the economy and the Government will pay close attention to the results of these studies. Areas such as the restaurant, hotel and licensed premises sectors are of particular concern as it is estimated that they contributed approximately 3% to overall inflation in the past five years. This highlights the need for pay and profit restraint in these sectors to reduce price pressures and we must ensure that the wage increases granted under the social partnership agreement, Towards 2016, are reflected in productivity gains.
In addition to the steps already outlined, the Government is taking a broad approach to dealing with inflation. We are investing heavily in public infrastructure, which will enhance our ability to produce goods and services more efficiently and, therefore, help keep inflation down on a continuing basis. The economic conditions fostered by the Government will support the economy's competitiveness and provide the basis for our continued future economic success.
I ask the Minister to comment on a few important features of inflation in the past five years. Is he aware that the prices of goods in the shops, once the old reliables of alcohol, fuel and tobacco are removed, have not increased in the past five years, whereas the prices of services priced or regulated by Government have increased by 40%? I note the Minister indicated that his colleague, the Minister for the Environment, Heritage and Local Government, has told the local authorities they must get their act together by reducing the burden imposed by commercial rates. Does he not agree that the first priority for Government in managing prices in its own sector is to get its act together? Does he accept that manufacturing, which has taken a price cut in the past five years, cannot survive if Government controlled sectors are so far out of line?
Will the Minister back up his statement that prices for products set by regulators are competitive when compared with prices in other countries? Gas is 50% more expensive and electricity much dearer than in the United Kingdom. On what grounds does he base the statement that the regulated prices set by the Minister and the regulators are competitive?
I do not set prices, they are set by the regulators. There is an independent regulatory sector. The specific characteristics of an island market of this size mean that the electricity and gas sectors differ from those of the United Kingdom and other countries. The Government's long-term strategy is to continue to reposition the economy towards the production of more knowledge intensive goods and services. As these tend to be less energy intensive, this development should help reduce our exposure to international energy price developments. The regulator must also take into account investment returns in terms of the nature of the market in which investment is being made. As I indicated, the size and island nature of our market must be taken into account in terms of the major utilities.
The impact of higher energy prices on the economy will ultimately be a function of how economic agents, including policymakers, react. In the past, higher energy prices resulted in higher wage demands and increases in public spending, both of which had a detrimental impact on economic performance. There is now a greater awareness that we cannot compensate ourselves for these increases. We are, therefore, coming from a position of insufficient competition in the marketplace in certain areas. The purpose of independent regulation of the market is to meet EU requirements and facilitate competition. Interconnection between North and South and east and west should open up possibilities to reduce inflation in these areas.
Has the Minister examined the statistics provided by the CSO which show that the Government regulated sectors have price increases of two and a half times the rate of the rest of Europe? These other European countries are experiencing the same oil price increases, interest rate rises and international pressures of competition. It is only prices regulated here, however, that show these hefty increases.
The Minister is disavowing any responsibility for this. Is he not aware that it is Ministers who set prices for rail and bus services, televisions licences, prescribed drugs, health insurance and so on? Many of the sectors in which the greatest increases have taken place are those where prices are directly set. Is the Minister not aware that the regulatory framework is set by the Government and that it is his responsibility to cure the deficiencies he has acknowledged in our regulatory framework?
I am not suggesting there are simply deficiencies in the regulatory framework. I am saying this is the discipline imposed on the market by the introduction of the independent regulatory framework. In the past, prices in these areas were regulated by Departments working through the commercial semi-State sector. All sides in this House long ago agreed that commercialisation of the semi-State sector is a requirement for our continued sustainable competitiveness.
Services inflation has added some 10% to overall inflation. It is a wide-ranging concept covering electricity, gas, telecommunications, alcoholic beverages consumed on licensed premises, meals out, housing, rent, mortgage interest repayments, insurance, public transport, entertainment and recreation, education, household services and miscellaneous services including child care, social protection and package holidays. Where inflation in health and education is running at close to 5% it should be noted that these sectors have relatively small weights in the basket of consumer goods and services and that their impact on overall inflation is relatively low. Many factors that influence health inflation, such as doctors' and dentists' fees, are outside Government control.
I said in my reply that the level of service inflation is a cause for concern and that we are working to deal it with as comprehensively as possible, recognising the changed structures of some of these markets and how they operate in Ireland.