Tax hikes on cards as inflation rate falls

THE dramatic fall in the inflation rate from 2.9% to 2.3% opens the way for Finance Minister Charlie McCreevy to increase consumer taxes and charges in his December budget, leading economist Austin Hughes warned last night.

And the business sector asked Mr McCreevy not to put any upward pressure on inflation by increasing taxes and charges.

IIB Bank chief economist Austin Hughes warned the most likely immediate significance of the slowdown in inflation will be significant increases in indirect taxes and charges for public services in Mr McCreevy’s budget.

“Such increases are made more necessary by low inflation, which will dampen the pace of tax revenue growth in the coming year. In addition, Mr McCreevy may feel that with inflation already comfortably low, hefty tax hikes or increases in public sector charges won’t move the headline inflation rate to the extent that it jeopardises Irish competitiveness. Nor will such increases squeeze the ‘real’ spending power of households excessively in the coming year,” predicted Mr Hughes.

IBEC chief economist David Croughan said that unless the cost of government services are brought into line with traded prices, Ireland would fail to redress the competitiveness loss and businesses would suffer from lower margins which would put investment at risk. “Government should not see the fall in the rate of inflation as an opportunity to raise taxes or charges,” he said.

ISME chief executive Mark Fielding said it is vitally important that a lid is kept on public sector costs and that the Minister for Finance does not use the budget as an opportunity to introduce further inflationary pressures into the economy through “indirect taxation and other stealth taxes”, which would prevent Ireland reaching the achievable goal of getting inflation below the EU average.

“To gain a competitive advantage over our EU counterparts, it is imperative that the Irish rate achieves a level significantly below that experienced in other EU countries,” he added. Mr Fielding warned that, based on past experience, Irish inflation is extremely volatile and is particularly influenced by increases in the provision of the cost of public services and taxation.