Households face a long, cold winter and many businesses will struggle to keep lights on as Europe plunges into an energy crisis that is as dangerous to the economy as Covid.
Judging by the comments of some government officials here, one would think Ireland’s coffers were empty and the state on the brink of bankruptcy. Neither is the case – the budget is filled with cash and there is easy access to financial markets for credit at less than 3 percent by 2050.
The government must intervene quickly and on a large scale. This is a short-term emergency and we risk a vicious downward spiral of falling incomes and busting companies that sets the stage for a deep recession.
If Treasury Secretary Paschal Donohoe wants to send a signal that he won’t give up on his budget commitments, he should accompany any aid with a pledge to get rid of the €2.4 billion a year in energy subsidies before the crisis hit.
Flat-rate upper price limits must be removed and replaced by targeted measures.
Small businesses that now have tens of thousands of dollars in energy bills are simply going bankrupt and need relief too.
If you just look at the headlines you might be wondering what all the fuss is about – the ratio of energy use to economic output makes Ireland the most efficient in the European Union. Ireland also has the least exposure to Russian gas of any EU country.
As always, GDP headlines are deceiving – shifting multinational profits doesn’t require much energy consumption.
Vulnerabilities run high here, and according to the International Monetary Fund, price hikes have been more pronounced in countries with high natural gas dependency and relatively limited power interconnections, such as Ireland, which is stuck on the edge of Europe and linked to Britain, which has limited connections from its own. Spain and Portugal are other outliers.
Energy prices are up 40 percent in the 12 months to August.
First, aid to consumers must be well targeted. Many of the previous energy subsidies are blanket measures that reward the rich who use more energy. Not only that, they increase consumption, drive up market prices and fill Vladimir Putin’s war chest.
Compensating the poorest 20 per cent in Ireland would cost 0.2 per cent of GDP
According to the IMF, fully compensating the poorest 20 percent of the population here — the Economic and Social Research Institute says 29 percent of households are already experiencing some form of fuel poverty — for the 2021-22 price hike would cost 0.2 percent of gross domestic product. If you base this calculation on a measure of the Irish economy that removes multinational distortions, the figure is around 0.37 per cent of GNI*, much closer to the European average of 0.4 per cent of GDP.
If those payouts were extended to the next poorest 40 percent at half the rate paid to the very poorest 20 percent, the cost would rise to 0.8 percent of GDP, so broader coverage would be much more expensive.
Overall, energy accounts for 9.2 per cent of Ireland’s budget, but there is a wide variation from 10.6 per cent for the poorest tenth to 6.7 per cent for the richest, IMF data shows.
Measures such as value added tax and excise tax cuts or price caps are not only the most expensive measures for strained national budgets, but also regressive – from which the rich in particular benefit.
Less than a third of the benefits of these policies go to the poorest 40 percent, according to ESRI.
The squeezed middle – paying taxes but receiving few benefits – is excluded
The problem with policies targeting the poorest is that those who see themselves in the “squished middle” — paying taxes but not getting much welfare — are left out, and that sounds like a recipe for Yellow Vest protests and electoral death for every government.
One way to introduce more equity would be to give households the right to buy a certain amount of energy at an administered price based on past year’s consumption. You can design the system to incentivize saving by saying that 75 percent of that consumption will be covered and the rest and any excess will be bought at market prices.
This is an idea of economist Jean Pisani-Ferry and would be fair in the sense that richer people would consume more and receive proportionately higher allowances. However, they would also be forced to buy more energy at market prices.
The measure would also support the less affluent as they would receive more support in proportion to their income. But it sounds complex.
When supporting companies, the reasons for the measures and their duration must be clearly stated. We should not end up with open-ended commitments, as the VAT cuts on hospitality seemed to be about to do during the financial crisis.
Large, energy-intensive companies typically have access to working capital and can absorb or pass on a temporary cost shock. Companies such as CRH, Ireland’s largest, and Kingspan have both shown this in their most recent results.
If you are one of the small and medium sized businesses employing over a million people in Ireland and one that is at the bottom of the supply chain then you don’t have the pricing power or the balance sheet to leverage.
Government measures should focus on providing liquidity support to struggling companies and be accompanied by conditions that encourage energy savings. Grants and subsidies, the IMF says, should be in the form of lump sums with the same conditions.
The successes of the pandemic measures are obvious. There is little lasting damage to the economy and jobs, and that has helped bring record numbers of people into work and strong growth in the domestic and international sectors, the second-quarter national accounts showed last week.
There’s no point in bailing out businesses and jobs in 2020 and 2021 only to see them perish in 2022.
There’s even an advantage. Ireland has underperformed on emissions and this is an opportunity to embed the green transition and spread the benefits further.
https://www.independent.ie/business/budget/government-action-can-overcome-energy-crisis-but-it-needs-to-be-smart-41970117.html Government action can overcome the energy crisis, but it has to be smart