Tax-related incentives to encourage people to put money into long-term savings accounts could form part of the Government's response to rising inflation, the Tanaiste said yesterday.

Ms Harney said the idea was a new one which had not yet been discussed by the Government, but the Progressive Democrats would be putting it forward in the discussions leading up to the next budget.

Expressing her opposition to any deviation from the Government's policy of reducing personal income tax rates, Ms Harney said they were still higher than they should be.

Despite forecasts that further cuts would fuel inflation, her party remained committed to achieving standard rates of 20 per cent and 40 per cent.

There were fiscal measures the Government could introduce, however, and she believed we should examine an earnings-related savings scheme.

Recent Government decisions on foot of the third Bacon report had made them an unattractive option, but there was now scope for a scheme which would give people tax-related encouragement to put money into a savings scheme "for perhaps five years".

She said this measure would be in addition to, and not a replacement for, tax cuts.

"I think if there was a well thought-out earnings-related savings scheme, like they have in the United States and other countries, that would be very attractive to a substantial number of people who at the moment don't see many alter natives for saving because of the low rate of interest that applies."

Ms Harney said recent Government measures to curb inflation, such as the temporary prices order on drinks, were not intended to have medium or long-term effects, but would have a temporary "dampening down" of inflation.

The issue was discussed at yesterday's meeting of the Progressive Democrats' parliamentary party meeting in Waterford. The economic successes of recent years had been hard won and inflation would be the most successful way of eliminating them, she said.

There was very little the Government could do about the external factors which had contributed to the inflation rate of 5.5 per cent published yesterday, such as oil prices and the low value of the Irish pound.