MINISTER FOR Finance Brian Lenihan has hinted that a tax increase may not be applied to cigarettes in the forthcoming budget.

He told the Dáil that “any further increases in the rate of excise on tobacco will have to be considered in the context of the law of diminishing returns that apply to tax increases”.

Mr Lenihan pointed out that Ireland has the highest priced cigarettes in the EU and the highest excise on tobacco products.

“It has to recognised that we have a long-standing policy for sound health and social reasons” to have high taxes.

In the last three budgets the tax on cigarettes rose by € 1.30.

He said “there are ongoing demands for the rate of excise on cigarettes to be increased by significantly more” but it had to be looked at in the context of “the law of diminishing returns”.

He said, however, that alcohol as well as tobacco is considerably dearer in the Republic compared to the North and Ireland “has the highest excise rate on wine in the EU”.

But tax on beer had not been increased since budget 1994 while the last increase on cider was in budget 2002, and 2003 for spirits.

He stressed that the North’s “major pull factor is the sale of cigarettes and alcohol”.

Labour’s finance spokeswoman Joan Burton queried, however, whether the Minister knew much about “the psychology of shopping” pointing to the major difference in price of clothes in British stores North and South.

She suggested he go shopping and bring the Cabinet with him.

Joe McHugh (FG, Donegal North-East) asked the Minister to consider providing “some type of stimulus package” in the budget such as a car scrappage scheme or domestic housing services.

He also suggested a reduction on VAT on certain items such as baby products which were much more expensive in the South.

A Revenue Commissioners’ report on cross-Border shopping indicated that it would be worth between €450 million and €700 million this year, with a loss of VAT and excise of between €72 million and €112 million.

Mr Lenihan said he would “examine any proposal that might help to stimulate the economy” but noted that the difference in prices North and South was often not linked to tax.

Fine Gael health spokesman Dr James Reilly said a 10 cent increase on wine, beer, cider or spirits would meet the cost of VAT reduction on the cervical cancer vaccine from the higher to lower rate.

A €2 increase in the price of a packet of cigarettes to reduce consumption, “might cause a law of diminishing returns to apply not only to the tax take but also to the number of heart attacks and cases of cancer”.

Mr Lenihan said if he increased excise duties “deputies will have to carefully assess the impact such a measure would have on exchequer revenue and on the degrees of shopping that takes place outside this jurisdiction”.