IBEC calls for action on inflation

The public finances could fall into crisis if the Government does not take immediate corrective action on inflation, economists at business and employers' group IBEC said yesterday.

IBEC chief economist Mr David Croughan said the Republic's current inflation of 4.7 per cent, more than twice the EU average, was dangerously close to becoming rooted in the economy and damaging long-term competitiveness. A rapid reining in of Government spending and a moderation in wage demands would be required if such a scenario were to be avoided, said Mr Croughan, commenting on the findings of IBEC's latest Quarterly Economic Review.

"The key task is to temper this excess inflation before it becomes embedded," he said, attributing the current rate to a combination of tax giveaways, high Government spending and high wage expectations in recent years.

"It's when wages start growing very strongly that you start to embed inflationary impetuses into the economy," he said.

IBEC is urging the Government to implement "good economic management" and to recognise that "wages chasing prices" will only result in higher prices, damaging real income. Public sector wages merit particular attention, the association believes.

Mr Brian Geoghegan, IBEC's director of economic affairs, said yesterday that he was "very worried about the public finances".

Mr Geoghegan believes that a combination of falling revenue forecasts and rising public spending has left the Government with "no room to manoeuvre".

Government figures show that, in the five months to May this year, Government expenditure was growing by 27.2 per cent, while tax revenue was falling by 1 per cent.

Mr Geoghegan said he was concerned about benchmarking against such a backdrop, particularly in light of a report in yesterday's Irish Times, which pointed to teachers gaining a pay increase of up to 15 per cent under the benchmarking process. "This also has implications for the private sector," said Mr Geoghegan.

IBEC is calling for Government spending to be forced down close to "single figures" and for current Government spending inflation of 10.3 per cent to be reduced. "Looking to 2003, it would appear that, if there is not urgent remedial action taken, we could incur a deficit of 3 per cent of GDP, which will grow and put the finances up against the constraints of the Stability and Growth Pact," the association's quarterly review reads.

The lobby group is also urging the Department of Finance to provide increased clarity on how the public finances are calculated and expressed so that effective economic commentary can be made by observers. Mr Croughan said that current spending figures were "probably distorted upwards" by factors such as increased social welfare payments, and raised questions over the "conundrum" of falling tax revenues in an economy where employment levels have remained virtually stable.

In this light, Mr Croughan called for the Department to issue monthly versions of "cleaned-up" accounts in the future. "What we do know is that they are bad," said Mr Croughan. "What we need to know is how bad."