There have been calls for VAT cuts as the price of food is set to rocket alongside fuel prices as Government prepares for calls for pay increases.

Fears are growing in Government over the growing "contagion" between fuel inflation and rising food prices.

The effect of fuel price rises on the cost of food is driving a growing demand for cuts in VAT on fuel.

One senior minister confirmed Ireland was seeking "flexibility" from Europe on changing our VAT rate.

Meanwhile, there are fears that industrial-relations peace could be the next casualty of the growing inflation crisis, as Government braces for a raft of 15% pay claims to match soaring inflation.

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Public Expenditure Minister Michael McGrath is facing a renegotiation of public-sector pay deals this year and already tensions are growing between the Government and major unions.

A row has already broken out between the Government and the Irish Nurses and Midwives Organisation (INMO) over the promised €1,000 pandemic bonus.

Tony Fitzpatrick, director of industrial relations at the INMO, yesterday lambasted the failure to pay up.

"Our frontline workers stepped up to the mark during a national health crisis. The HSE and Department of Health seem intent on making a mess out of showing our healthcare workers gratitude," he said.

The public service pay bill has risen by €5.6billion - or 32% - since 2017 to €23.5billion by the end of last year, so even minimal percentage increases have a significant fiscal impact.

One minister said: "The reality of it is that unless we get inflation under some sort of control these negotiations will be fraught. The unions cannot be expected to ask for less than the rate of inflation. The days of the 15% pay claim may be coming back."

Funding a 15% pay deal would cost the exchequer €3.5billion.

Inflation is currently at 5.6%, its highest in more than 20 years, and food industry sources have warned about further price hikes to come.

Retail management expert Damien O'Reilly said: "Pasta is set to double in price. Your pint of beer and your fish and chips will be going up in price too."

The head of the Restaurants Association of Ireland, Adrian Cummins, said another factor is that energy costs have rocketed. "The hospitality sector is a major energy user and we have seen bills rocket by approximately 50% in the last six weeks," he said.

TDs are piling pressure on the Government to cut the VAT rate on fuel. The 23% VAT rate is one of the biggest factors in electricity and fuel costs.

Provisional figures for 2021 indicate the Government took in more than €800million in VAT last year from petrol, diesel, home heating oil and electricity.

The Government is constrained in cutting VAT by European tax rules which limit the right of individual states to cut VAT rates independently.

But amid claims that other countries are cutting their VAT rates, the Government is accelerating attempts to secure what one senior source called "flexibility" to change the VAT rate.

"We're certainly looking at all options to ease the burden on households and businesses", the source said.

Commenting on VAT reductions, Fianna Fáil TD Willie O'Dea said: "There have to be concerns about the cost, but the reality is that businesses have to be helped to survive and workers have to be helped survive or we will have, at a minimum, wage war."

Former minister Michael Ring also called on Europe "to cut us a break. We should be looking at everything. Half the energy bill is still VAT. We are still taxing tax".

Fine Gael Senator Tim Lombard said: "Europe cannot be seen to stand by while people freeze."

And Fianna Fáil TD Jackie Cahill also warned: "Fuel and power costs are biting deeply in rural Ireland. It drives everything. Europe should give us the freedom to cut VAT. It makes sense."

Verona Murphy, Independent TD and president of the Irish Road Haulage Association, said the Government "can apply to Europe if they like but they should act and cut the rate anyway".

She warned: "There needs to be bravery and if necessary independent action or if we are not careful we will be experiencing a repeat of the fuel crisis of 1977."