A further rise in Irish inflation should not deflect the Government from directing tax cuts at the lower paid in the next budget, according to business groups.
Wage inflation rather than price inflation poses the biggest danger to the Irish economy, business leaders say. They believe the Government must keep a tight grip on public expenditure to prevent an inflationary wage spiral, while it should also target tax reductions at the lower-paid to encourage greater participation in the workforce.
As the Cabinet meets today to consider its budgetary options, Labour Party leader Mr Ruairi Quinn warned that unless it focuses on increasing personal allowances and widening the tax bands, the future of social partnership in Ireland will be seriously threatened.
"The tax package which was delivered in the December budget was a serious undermining of social partnership. Not only did it exclude the majority of Irish workers who only pay tax at the standard rate but it reduced the incentive to work," Mr Quinn said.
"A carefully measured approach to reforming tax, which is targeted at low and middle income earners would, in the long term, reduce expenditure on employment subsidies." His views are echoed in the business community.
Mr Peter Faulkner, chairman of the business association ISME, says the amount of tax paid by those on low incomes is "obscene". He believes tax cuts for the lower paid would not have any impact on price inflation, but would increase the incentive to work and reduce Government spending on unemployment.
In addition to tax cuts, businesses believe the Government has a key part to play in keeping a lid on wage inflation by controlling public sector pay, a key component of Government spending.
"If wage inflation gets out of hand it can be more dangerous than price inflation," says Senator Fergal Quinn, chief executive of Superquinn.
Despite the publication yesterday of slightly higher-than-expected consumer price figures, competition in the retail sector and the ability of importers to switch sources from Britain to continental Europe have helped alleviate upward pressure on prices.
IBEC's director of economic affairs, Mr Brian Geoghegan, believes that after peaking in the third quarter, inflation should start to slow, to average 3 per cent for 1998 as a whole. Interest rate reductions later in the year and the 3 per cent improvement in the pound's effective exchange rate since March should then put downward pressure on prices.
Meanwhile, the Irish Creamery Milk Suppliers' Association (ICMSA) said the increase in the price of food, which accounted for nearly two thirds of the rise in the May inflation figures, was mainly due to increased prices of imported food items and meals out.
