The Treasury Department’s chief economist, John McCarthy, has warned that the government cannot take full responsibility for cushioning the blow to inflation.
In a presentation released by the ministry this week, Mr McCarthy said interest rate policy is always the first line of defense against runaway inflation, but that fiscal policy has been called for in recent months amid an unusually rapid and large inflationary shock.
However, governments everywhere must now do a balancing act and avoid fanning the flames of price increases with their financial aid.
He said all interventions must be “timely, targeted and temporary” but there is no way government balance sheets can fully absorb the impact of inflation on budgets.
His comments, originally made at the Global Government Forum annual summit in Tallinn, Estonia, echo Finance Minister Paschal Donohoe’s recent comments, reiterating that “the days of cheap finance are over” and that the upcoming budget will be conservative would need its treatment of inflation.
Irish inflation hit 8.2 per cent in May, a 40-year high, and the government has come under pressure to do more after cutting fuel excise taxes, distributing energy credits and adjusting tax margins in the latest budget.
Mr McCarthy, who coordinates the budget process and analyzes the impact of policy options on public finances, pointed out that the Irish government has already invested around 1 per cent of national income in tax cuts, transfers and subsidies to cushion the impact of inflation.
However, he added that given their high net worth, Irish households are in a strong position to rise to the challenge after years of saving and paying off debt.
The European Central Bank (ECB) has announced that it will start raising interest rates in July and again in September to tackle euro-zone inflation, which has topped 8%, but the impact is unlikely to linger for many months to come .
Meanwhile, central bank governor Gabriel Makhlouf has warned insurers to prepare for the “side effects” of Russia’s war in Ukraine, such as sudden market corrections and economic shocks.
His comments at Insurance Ireland’s annual luncheon, attended by many Ireland-based international insurers, contrasted with the confidence he had expressed about the Irish economy just the day before, when he said he expected that country will avoid a recession.
