New “cost of living” measures are inevitable as inflation nears a 40-year high this summer, as predicted by a leading think tank.
But the government may need to better target its handouts if it wants to avoid becoming part of the problem, says the Economic and Social Research Institute (ESRI).
While poorer, rural and older populations tend to bear the brunt of rising prices, most of the costs of recent government subsidies have fallen on the top half of income earners, according to ESRI in its latest economic commentary.
While it is desirable to cushion poorer households from rising energy bills, it is less desirable to put everyone’s money in their pockets through €200 credits or cuts in excise duties.
Ireland’s economy was already booming before Russia’s invasion of Ukraine last month, said ESRI research professor Kieran McQuinn.
He advises the government to “keep spending under control” except in critical areas such as housing or the risk of further inflation and “serious repercussions” on public finances.
“The economy is in a kind of unique position. On the one hand, it is growing very strongly and will emerge from the pandemic with very strong growth. Even before the pandemic, we started talking about the problems of overheating.
“Anything the government does to increase aggregate income levels in the economy is by definition inflationary, at a time when significant inflationary pressures already exist. So it’s a difficult balance.”
And state subsidies can only counteract the rising cost of living to a limited extent.
Budget 2022 and the latest anti-inflation support package will increase household income by just 1.75 percent this year, while price increases are expected to average 6.7 percent for the year, according to ESRI’s latest economic commentary.
The classic way to tame inflation is to raise interest rates, which the European Central Bank has indicated, but only later this year and very gradually.
However, there are risks if the ECB acts faster to curb the price rise.
Bigger rate hikes mean higher repayments for borrowers, less investment and consumption, and potentially more loan defaults.
The escalating war in Ukraine also poses broader economic risks to the Irish economy.
With EU leaders now seriously discussing a Russian oil and gas embargo, analysts are beginning to warn of fuel shortages in key sectors like transport.
Europe is most at risk from a “systemic” diesel shortage that could lead to rationing, according to traders who spoke to the financial times.
“There is a significant risk that should tensions increase, there could be further disruptions to gas and oil supplies and, in the worst case, end-user rationing in Europe could be required,” ESRI said.
While Irish companies are not directly exposed to the Russian and Ukrainian markets – combined trade in goods with the two countries accounts for less than 1 per cent of total trade – some sectors could be more affected and require government intervention.
Agriculture Secretary Charlie McConalogue has already announced a €12 million aid package to help farmers, but with rising prices and looming grain and fertilizer shortages, the farming sector “will face challenges,” ESRI warned.
Any slowdown in Ireland’s key trading partners in the EU, US, UK or China could hurt investment and growth here, leading to “increased business distress,” said ESRI research professor Conor O’Toole.
“Should any of these risks materialize, it could have a significant impact on public finances,” ESRI said.
https://www.independent.ie/business/irish/more-targeted-measures-needed-if-dire-inflations-forecasts-come-to-fruition-41477218.html More targeted action is required if bleak inflation forecasts prove correct