This is an edited version of my Sunday Times column from January 22, 2012.
Back in 2004, with much fanfare, Fine Gael launched its
ripoff.ie campaign that highlighted a large number of cases where
policy-related or regulated price structures and practices have resulted in our
cost of living falling well out of line with other Euro area economies. In
2009, Fine Gael launched a policy paper that was supposed to end Rip-off
culture, including in state controlled sectors, once and for all.
Fast-forward to today. Since elections, having abandoned its
pro-consumer agenda, Fine Gael has done marvellously in playing a ‘responsible’
possum to Irish vested interests.
According to the CSO, year on year, consumer prices in
Ireland rose 2.5% through December 2011. The
range of these price changes across sectors, however, was dramatic.
Clothing and footware prices were up
0.4% in 12 months through December,
Furnishings, Household Equipment and Routine Household Maintenance prices fell
1.9%, Recreation and Culture deflated by 0.6%
and Restaurants and Hotels costs fell 0.9%. Health costs rose 2.6%, Transport
by 1.6%, Education by 8.9%.
Majority of these price hikes have nothing to do with
private firms ‘profiteering’. Per Purchasing Manager Indices, tracking the
changes in input and output prices for goods and services, Irish firms and MNCs
have experienced sustained shrinking of the profit margins since the beginning
of the crisis, as consistent with deflation. Instead, the largest price
increases, and ever expanding profit margins, took place in the sectors that,
in the past, Fine Gael have correctly identified as being state-controlled
parts of the Rip-off Ireland.
Food and non-alcoholic beverages prices are up just 5.9% in
the last 10 years, cumulatively. State-controlled Tobacco prices are up 69.6%
and Alcohol 21.6%. Housing, Water, Electricity, Gas and Other Fuels – single
largest category of consumer spending – is up 64.4% on December 2001, with 90%
increase in Energy Products costs, 63.3% increase in Utilities and Local
Charges, and 99.1% increase in Mortgage Interest costs. In the last five years,
Rents have fallen 8%, while Mortgage Interest rose 11.3% despite the fact that
ECB rates have dropped 2.5 percentage points over the period. Electricity
prices are up 28.3% in 5 years and 11.5% in the last year alone, despite the
fact that natural gas prices – the main generation source for Irish electricity
– have declined worldwide.
While Fine Gael cannot be blamed for the full extent of
price hikes since 2001 or 2006, the current Government bears responsibility for
failing to address state-controlled inflation since taking the office.
The above sectors are indirectly controlled by the state via
regulation, state ownership of banks and enterprises, and indirect tax
measures. But what about those costs more directly set by the Government?
Health costs are up 56.5% on December 2001, Education is up
81.5%. In Health, the core drivers of inflation have
been Hospital Services (up 40.2% since December 2001 and 9.8% in 2011), Dental Services (up 20.6% in 5 years, but
down 0.3% in the last 12 months). Meanwhile, prescribed drugs prices are down
11.3% on 2006 and 4% in the last 12 months. Health insurance costs are up 75.7%
and 22.9% since December 2006 and in the last 12
months, respectively. This in a country with younger population and well-established
trends in terms of demand for healthcare. In contrast, vehicles insurance –
privately provided and similar in predictability of total claims risks –
inflation since December 2006 amounts to just 9% and
0.9% in the last 12 months.
Same story of the state-led rip-off is replicated in the
Transport sector. Here, overall costs are up 9.3% in the last 5 years, but bus
fares are up four times as much. Privately controlled costs of buying vehicles
have declined 15.4%, while state-set motor tax rose 14.3%. Ditto in
Communications, where telecoms services costs are up 5.8% in the last 5 years,
but postal services up double that.
In two sub-sectors of education where the Government has
least power to influence prices – Primary Education and Other education and
training – inflation is the lowest. The highest price increases are in the
third level education, with prices up 50.1% in just 5 years (13.4% in last 12
months alone).
The above clearly shows that the Government and the
semi-state bodies and enterprises it owns, along with the banks are at the
heart of the extortion racket that is our cost of living. Over the recent
years, rapid deflation in prices and costs in the private economy has been
offset by the rampant inflation in prices and costs in the state-controlled and
regulated sectors. In majority of cases, this inflation was directly benefiting
state and semi-state employment, management and Government coffers. In all
cases, the costs were directly impacting Irish consumers who are left with no
meaningful choice, but to comply with the pricing structures set in the
markets.
CHARTS:
Sources: CSO database and author own calculations
Meanwhile, Budget 2012 clearly shows that the Government is
hell-bent on extracting ever-higher rents out of consumers through taxes and
charges.
For example, the Government has introduced increased
mortgage interest relief that amounts to €52 million in help for most
indebted-households. But the very same Government refuses to intervene in the
banks’ internecine policies of shifting the burden of losses from trackers onto
the adjustable rate mortgagees. The households that the Government finds in the
need of increased mortgage interest relief will be liable for the new Household
Charge. And, if Minister Noonan has his way, mortgagees who default on their
loans will pass into outright debt slavery to the banks.
There are more direct inflation-linked or inflation-raising
taxes, such as VAT. Increase in the VAT rate simultaneously pushes up the
overall tax component of all goods and services sold in the state that are
taxable at the higher rate (an increase in inflation of some 9.5% for those
items) and increases the costs of all goods and services that are dependent on
intermediate inputs. Excise tax on tobacco comes against the Revenue
Commissioners’ analysis showing that tobacco taxes have reached, even before
Budget 2012 measures are factored in, the point where higher taxes harm
receipts and fuel black markets. And Carbon Tax quadrupling from €5 per ton to
€20 per ton has been responsible for some 2% rise in inflation in fuel and
related activities. Motor tax increases, accounting for double the share in an
average household expenditure that accrues to bus fares, are going to directly
drive up the cost of transport.
Increases in State charges for hospital beds are expected to
raise the cost of healthcare for middle class patients by some €268 million in
full year terms. Health insurance levy hike further compounds this inflationary
grab-and-run approach to policy. Secondary education ‘savings’ are likely to
see parents being forced to cover much of the gap in funding out of their own
pockets. Third level measures, while relatively modest in size, will compound
massive inflation already accumulated in the sector over the last 5 years.
By the metrics of the Budget 2012, the current Government
didn’t just mothball its pre-election ideas on reducing the reach of the
State-sponsored Rip-off Ireland, it has actively moved to embrace the cost-of-living
increases through indirect taxation and encouraging avarice of the semi-state
commercial bodies and dominant near-monopolies. All of which means that the
path to economic recovery we continue upon is the path of deflationary spiral
in private sector economy, with mounting unemployment and businesses
insolvencies, offset by the unabated cost increases when it comes to the meagre
services the State does supply or control.
Box-out:
Following an almost 11% month on month decline in trade
surplus in October, Irish exporters have posted a record-breaking return to
health in November, bucking all expectations. The market consensus was for the
Irish trade surplus (merchandise trade only) to decline marginally to ca €3.4
billion in November. Instead, the trade surplus rose – on seasonally adjusted
basis – to €4.31 billion – the highest on record. In 11 months through
November, cumulative merchandise trade surpluses now amount to €40.53 billion
or 1.6% ahead of the same period in 2010. As before, the core drivers of trade
surplus were exports increases in Organic Chemicals, and Medical and
Pharmaceutical products, while indigenous exports rose significantly during the
last year in Dairy products category. The latest data highlights the resilience
of the Ireland-based MNCs’ exporting capabilities, providing continued contrast
to the majority of our counterparts in the Euro area ‘periphery’ who have been
posting dramatic slowdowns in exports and deepening trade deficits since the
beginning of Q4 2011.
