Budget is key to survival of national deal as inflation rises

As Ireland's official inflation forecast for 2000 hit 5.25% in August 2000 - thus almost wiping out the year's nationally agreed pay increase of 5.5% - trade unions focused their hopes for compensatory measures on the 2001 national budget, due in December.

Ireland's growing inflationary trend (IE0005151F) received some official recognition in August 2000, in the form of an upward revision of the average inflation forecast for 2000 by the Department of Finance. The forecast is now 5.25%, as opposed to the 3% figure on which the national pay deal, the Programme for Prosperity and Fairness (PPF) (IE0003149F), was based earlier in the year. Since this year's PPF wage increase is 5.5%, this means that in 2000 at least, workers' annual pay increase will be almost totally eaten up by inflation. The PPF deal was based on a predicted 3% average rate over the three-year period 2000-2, so inflation would have to fall significantly in the next two years to produce the predicted real pay increase over the three-year agreement.

The Department of Finance review noted that, while much of the recent rise in inflation was due to oil prices, the weakness of the euro and a large one-off increase in tobacco taxes, there was also significant domestic inflation. Service sector inflation is currently running at 7%, as opposed to an average of 4.7% in 1999. The latest monthly inflation figures show a 6.2% rise in the consumer prices index in the 12 months to July 2000. Many commentators predict that this figure will rise to 7% in the coming months, if not weeks.

The issue is likely to top the agenda at a meeting of the social partners during September 2000. The central problem is how to compensate workers for inflation without increasing the pay terms of the PPF, which could easily lead to a wages/inflation spiral - an option which the trade unions would sooner avoid.

Earlier suggestions for addressing the problem centred on reducing indirect taxes in the 2001 national budget, to be presented in December 2000. However, while reducing "headline" inflation, this could also encourage consumption spending, and hence further inflation. The other option is compensatory income tax cuss - but last year's budget tax cuts are seen by many as having sparked the current bout of inflation.

As an alternative, a "pension bond" of IRL 500 per person has been suggested by the country's largest union, the Services Industrial Professional Technical Union (SIPTU. This would increase by the GNP growth figure rather than conventional interest rates each year, and could only be drawn on by retirees, thus providing a financial benefit while restraining consumption.