Wednesday, 4 April 2007
Ceisteanna — Questions
Question 1: To ask the Taoiseach if the Government is planning to seek the removal of tobacco from the range of items used to measure inflation; the basis on which this is being done; if consultation has been held with the Central Statistics Office on the matter; if discussions have been held with the social partners on the proposal; and if he will make a statement on the matter. [1005/07]
I propose to take Questions Nos. 1 to 3, inclusive, together.
The Central Statistics Office, CSO, has responsibility for compiling the Irish consumer price index, CPI, and in accordance with the Statistics Act 1993 the director general of the office has sole responsibility for, and is independent in, deciding on statistical methodology. The CPI is designed to measure inflation. The CSO advises that to do this accurately the index must reflect the change in the average prices paid to purchase the full range of consumer goods and services available on the market, including tobacco products. This position is fully aligned with international best practice and, in particular, it applies in the compilation of the harmonised index of consumer prices, HICP, at EU level. The CSO compiles a sub-index that excludes tobacco products and it is shown prominently in the monthly CPI statistical release. I understand that some countries use such a sub-index as the reference index in wage bargaining.
As regards discussions with the social partners, the negotiation of pay agreements under social partnership is not linked systematically to the evolution of the CPI. Inflation is, however, a significant consideration in these negotiations and the question of the appropriateness of taking account of a measure that includes tobacco can be considered when the pay terms of Towards 2016 next come up for consideration.
What is the Minister of State saying? Did he say the attempt to excise tobacco has not died but will be raised again when something — I am not sure what — happens regarding Towards 2016? The Minister for Finance, Deputy Cowen, pledged to make this change in the budget but discussions with the social partners obviously did not go well. Does the Minister of State agree that it would be entirely wrong to excise tobacco from the calculation of the consumer price index because the price of tobacco is part of the cost of living?
The Minister for Justice, Equality and Law Reform, Deputy McDowell, boasted about his tenure of office as compared to 1997. The inflation rate, which is hovering at around 5%, was 1.5% in 1997. Has the attempt to excise tobacco and, in so doing, give a mistaken view of the cost of living been withdrawn or will the Government return to the issue when something — I did not catch the phrase the Minister of State used — is realised in respect of Towards 2016?
The point I made with regard to the negotiations on wages and a new partnership deal was that inflation is a significant consideration in negotiations and the question of the appropriateness of taking account of a measure which includes tobacco can be considered when the pay terms of Towards 2016 next come up for consideration. My comments are made in the context of discussions on wage agreements and pay, etc, taking account of such a measure. Countries throughout the European Union have already done so. In Belgium and France, for example, it is a legal requirement to use a CPI sub-index which excludes tobacco products for the indexing of wages and collective bargaining agreements. This was agreed as a result of negotiations with social partners. The matter arises in the context of social partnership bargaining.
With regard to the methodology, Deputies are aware that the Central Statistics Office works independently of Government. Deputy Rabbitte referred to ministerial colleagues. In checking with the CSO, the only intervention by Departments or Ministers was made recently by the Department of Health and Children, which raised the possibility of excluding tobacco from the consumer price index as a result of an observation made by the Irish Cancer Society. This is an ongoing discussion.
As the Deputy will be aware, an increase in excise duty of 25 cent adds approximately 0.4% to the rate of inflation. The price of tobacco is, therefore, an issue. Nevertheless, we must respect the independence of the Central Statistics Office. The basket of consumer items used in the CPI was rebased to take account of the many new consumer products people purchase. Tobacco is still one of the items adjudicated on as part of the calculation of the consumer price index.
While I fully agree with the Minister of State about respecting the independence of the CSO, his Government sought the excision of tobacco from the calculation of the CPI. The Minister for Finance said as much in his budget speech. Given that no Member of the House is trying to traduce the independence of the Central Statistics Office, the Minister of State and I are not in dispute on this matter. I heard him state, however, that as soon as the pay terms of the latest partnership agreement — patriotically termed Towards 2016 — expire, the Government will raise the issue again and take into account the contribution tobacco makes to inflation. While I do not know how the Tánaiste, who is briefing the Minister of State on the issue, feels about the social partners being able to obstruct this attempt by Government to artificially reduce inflation, they are correct that it would be an artificial reduction. Is it the position of Government that, having been thwarted on this occasion, it will return to the issue when the pay terms of the current agreement expire?
Issues such as that raised by Deputy Rabbitte will be dealt with by agreement. The Government is trying to reduce the number of people smoking for health reasons. There is an ongoing debate on how tobacco should be treated in the methodology by which the CPI is calculated. The issue may come up for discussion by agreement. It is important to note that in 2000, tobacco accounted for 3.6% of total expenditure, whereas in 2005, the figure had declined to2.6%. Government policies, for example, the introduction of the smoking ban in public places and health awareness programmes, have had an impact. Underlying this discussion are the health implications of smoking for members of the public. The consumer price index is based on independent data. With regard to further negotiations the matter would require agreement in the context of new negotiations in the partnership process.
Given the Minister of State's admission and the information he provided indicating that the proportion of expenditure on tobacco is declining, what would be the effect of removing tobacco from the CPI calculation? He referred to the approach taken in Belgium and France of producing a sub-index of their consumer price indices. Is it not the case that the state is the retailer of tobacco products in both these countries? Perhaps this is the reason for using a sub-index.
On the general issue of the consumer price index, does the Minister of State accept that the amount spent on the cost of housing, both in mortgage and rent payments, accounts for the largest variation between Irish inflation and average European inflation? Is this not the principal reason for the discrepancy between CPI figures here and those of other countries? Does the Minister of State have plans to remove housing costs from the consumer price index?
The CPI is used as a formula for calculating a number of thresholds for taxation purposes, for example, inheritance tax, for which the value of a property is increased every year in line with CPI, even though house price inflation is significantly higher than the consumer price index. Will a specific indicator for these thresholds be introduced to measure inflation in terms of particular sectors of the economy, including housing?
To discuss mortgage interest rates is to depart from the subject matter. There is no question of removing mortgage interest from the consumer price index. If there had not been upward movements in energy prices and mortgage interest rates, the inflation rate would have been 2.1% rather than 4% because these two areas account for around half of the inflation rate. Unfortunately, both factors are outside domestic control.
To conclude the discussion with Deputy Rabbitte, any efforts to remove tobacco from the consumer price index would be made in the context of wage agreements. The CPI must take account of tobacco because it is a commodity people buy and use.
To put it another way, if, for example, the Minister for Health and Children wanted the price of a packet of cigarettes to increase by €1, a conflict would arise because any such change would immediately increase the consumer price index. These issues are open for discussion in the context of wage agreements.
The method of calculating the rate of inflation needs to be changed but not in the way the Government requires. Is it not a complete sham of an inflation rate when, for example, over the past ten years Fianna Fáil and its partners in Government have facilitated at every turn the greed of speculators and developers, causing the price of a home to rise by 300% or 400%? That is not part of the consumer price index but it is a millstone around the necks of hundreds of thousands of working people and their families. It is like trying to give a picture of life in the 19th century without taking into consideration the burden on the peasant people of Ireland caused by the rackrenting landlords. Is it not a complete sham? If the real cost of living on workers was included in the official rate of inflation, it would be massively greater.
The Deputy is obviously not aware that we use European and international standards. There is no question of Ireland being any different from any of the other EU member states. There are EU-harmonised indices of consumer prices. As I said, the HICP reflects all the standard items used, including energy prices and mortgage interest rates, for example, which make up a major part of our inflation rate. If those two elements were eliminated from our inflation rate, it would be 2.1%.
The standards used are independently based. The CSO uses internationally recognised standards and is very much in line with our European colleagues. There is no official HICP sub-index that excludes tobacco, so tobacco is used in the indexes of other countries also.
How many times have the constituent items which make up the CPI been altered in the past 20 years? Is it not the case, for example, that house prices were included at one time but were subsequently removed? The items causing inflation which are not included in the CPI, such as the house prices referred to by Deputy Joe Higgins, are nonetheless major contributory factors in determining the actual level of inflation. Would it not be more realistic to make the CPI more reflective of the actual inflationary tendencies and the items that cause those tendencies in the economy?
All of the data can be accessed from the available statistics. Some 36 new items have been introduced while 33 have been deleted from the basket of goods and services and a further 48 items have been modified with respect to definition and coverage. The net effect is that where the previous basket of goods and services had 613 items, the new basket comprises 616 items. The main changes to the basket are outlined in documents I would be glad to share with the Deputy.
There are ongoing changes, as the Deputy noted. The most interesting point in this data is that the index is very much up to date. For example, MP3 players have been included for some years, replacing Walkmans and Discmans. Freshly prepared foods, fresh chilled shellfish, fresh chilled ready-to-eat meals——
People are no longer buying zips. This is up-to-date information. I have dealt with the issue of mortgage interest rates, based on the European standards. The position is the same as any other European country.
This question has been on the Order Paper for a long time. I suspect we are grateful to Dr. Paisley for distracting the Taoiseach so we actually reached it.
A serious issue is involved, which I am not entirely sure the Minister of State has correctly addressed. First and foremost, statistics from the Irish economy are an integral part of the statistics for the European Union and the methodology applied presumably must comply with EUROSTAT standards. It is not a question of any Government or Administration arbitrarily selecting the commodities, or of the CSO acting independently — it must act in compliance with agreed European standards and, if there is a change, it is one that is accommodated within the EUROSTAT principle.
Do I take it from the Minister of State's reply that the Government is trying to enable the Minister for Finance to put a punitive increase on the cost of tobacco in order to reduce consumption but at the same time to ensure that such an increase in the price of tobacco would not be factored into the calculation of inflation for the purposes of wage negotiation? Can the Government do this?
The answer is no. It is one of the goods consumed by the people. In weighting the goods, one must accept the realities. The main issue comes into play with regard to a new national agreement. There are also the health aspects, of which we are very conscious. My colleague, the Minister——
I have checked this. The only Government or departmental correspondence came from the Department of Health and Children, to which I referred earlier, on the basis of queries from the Irish Cancer Society, which was making a point in principle with regard to the inclusion of tobacco. This data is compiled based on international standards. We must accept the realities of modern living.
I was making the point with regard to wage negotiations that if there was an increase in excise duty of, say, 25 cent on a packet of cigarettes, it would add approximately 0.4% to the rate of inflation. Any discussion on this issue relates to national agreements and agreements with the social partners. There are realities and facts with regard to consumer goods, irrespective of whether we like them.
The Government has done much work in reducing consumption, in particular the Minister, Deputy Martin, in banning smoking in the workplace. This is reflected in the figures. As I said, tobacco as a percentage of total expenditure in 2000 was 3.6% and in 2005, it was 2.6%.
Those policies are working. The answer to the Deputy's question is that this is part and parcel of the consumer goods index and the European criteria, and will remain so.
The Minister of State said it is the policy of Government, given the opportunity and agreement with the social partners, to remove tobacco from the calculation of the consumer price index. I hope, notwithstanding the very close relationship, that the social partners will never change their view on this issue because, however much we in this House might deplore smoking — it is one small point of agreement I have with the Minister, Deputy Martin — nonetheless, it is a fact of life in terms of the cost of living. Were it excised, it would artificially reduce the CPI to the credit and advantage of the Government of the day and misrepresent the reality of the cost of living. The Government has been thwarted on this occasion because the social partners did not agree, but is committed to trying again. I hope it is not successful.
I explained the matter clearly to the Deputy, but I repeat I accept the realities. The issues have been raised in the context of health and of pay agreements, and they will come up for discussion. I am very much aware of the position of the social partners and the trade union movement on the issue.