Low inflation may complicate Budget maths

Thursday 27 February 2014 19.08
Prices have remained largely static - which could put pressure on the Budget arithmetic

Prices have remained largely static – which could put pressure on the Budget arithmetic

Business Editor David Murphy

There is growing sense that the recovery is taking hold – and it is easy to forget that Ireland has pencilled in another austerity Budget for October.

That is due to take a substantial €2 billion out of the economy.

Ideally, Finance Minister Michael Noonan would like to ease up on belt tightening. But his problem is inflation – or the lack of it.

Latest figures from the Central Statistics Office show the consumer price index, which measures the rise in the cost of living, increased by 0.2% over the past 12 months. So many prices barely budged (one big exception was residential rents, which rose by 9%).

Higher inflation pushes up the amount of tax collected.

So muted price rises mean the revenue collected by Government is likely to remain relatively flat in many tax categories.

Static prices are good news for people on unchanging incomes, and many argue that costs rose excessively during the boom.

But for the Coalition, an increase in some areas would help the Budget figures.

If inflation remains low Mr Noonan’s colleagues are set to get a nasty fright this summer, when they are presented with draft spending estimates for each Government department.

As things stand they will be staring at the ninth austerity Budget in a row (there were two Budgets in 2009).

However, it is still early in the year and circumstances might change.

Either way, ministers are unlikely to open a debate about cost-cutting before the local and European elections in May.

But it could well become a push-button issue after the results are in.

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