Scale of energy crisis means €11bn budget will still see most people worse off

The amounts of money involved in the budget package are extraordinary – for example the once-off measures on child benefit and energy credits would be worth over €1,000 for a family with three children in the coming months. Households who qualify for welfare payments would get additional once-off payments.

It is a measure of the scale of the energy crisis that a budget can involve spending and tax measures of some €11 billion and still most people will end up, after inflation, worse off. This is because inflation is set to remain high, averaging 8.5 per cent this year and 7 per cent next year. The price level in the fourth quarter of next year is expected to be 13 per cent higher than in the first quarter of this year; no budget package can compensate for all of that.

This means that despite significant once-off and ongoing budget measures, living standards will fall on average by about 3 per cent this year and 2 per cent next year. The budget will put money back into people’s pockets, but not enough to compensate for rising prices. This was inevitable – and the amounts being spent are significant on any criteria – but the wider political and public reaction will be interesting as the winter energy bills land.

This fiscal rescue mission has been funded by the extraordinary growth in tax receipts, led by corporation tax but also including other taxes. And by the strong starting position of the public finances, boosted by a bounce-back from Covid-19 which may now be running out of a bit of steam. The political rows over the budget package will continue, but could really ignite in 2023. By spring next year, the benefit of the once-off measures will be running out, but energy prices could still be high. The clamour to extend or repeat the once-off measures will grow; otherwise households will be worse off next year than this year and businesses could be vulnerable as their support schemes lapse.

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The exchequer finances, as now forecast, would allow for some extension of business supports and repeats of once-off welfare payments. But clearly this can’t all be made permanent. Paschal Donohoe and Michael McGrath successfully phased out the remarkably successful Covid-19 supports – albeit after extensions – but ending energy supports could be a more difficult political task for whatever ministers take the two roles after the change of taoiseach. It all depends on wholesale prices which, in turn, depend on unpredictable factors ranging from the course of the Ukraine war to the coldness of the European winter.

Economic flatlining

What can be forecast, however, is that the economy is now slowing under the weight of the energy crisis. The domestic economy is expected to grow by just over 1 per cent next year, effectively an economic flatlining as consumer spending slows rapidly. Slow growth and high inflation – stagflation in the jargon – are a toxic political mix.

Slowing growth means that the permanent budget measures are also important and reflect the new inflationary world we live in. An increase in the entry point to the higher tax rate to €40,000 will benefit middle and higher earners – by up to €640 per person – while a €75 hike in tax credits and universal social charge changes will benefit all income-tax payers. The cumulative gain is €831 for those earning enough to fully benefit from the standard band extension, though those just below this threshold may feel hard done by. Permanent welfare rates will rise by €12 per week.

These are substantial measures, though they are really a response to rising inflation. Arguably the tax and welfare system should adjust each year to take account of inflation – the tax band rise, for example, is needed if people are not to see tax take a higher slice of their income as wages rise.

Meanwhile, inflation means government departments needs more cash to operate – and so it remains to be seen how far increased allocations will go as spending rises by 6.3 per cent. As ever, delivery in areas like housing and health remains crucial – and seems to be an ongoing challenge.

The political mood together with the Covid and energy crises is accelerating the move to a bigger State – as well as massive spending on housing, this budget involves an extension of the GP card, free primary school books, more State subsidies for childcare, an extension of the public transport discount and new social supports.

In time, a bigger State will require more taxes. Donohoe signalled a wider examination of the taxation system would be undertaken, on the basis of the report of the Commission on Tax and Welfare.

He has also put aside €6 billion into a new national reserve fund (previously known as the rainy-day fund) to help pay future bills. For now, the budget sums allow this and give a fighting fund to combat the crisis. And a big forecast surplus next year leaves room for manoeuvre if more needs to be done. But this winter will be difficult, nonetheless, and big calls await in 2023 as the economy slows and inflation stays high.