‘People’s income is able to purchase less and less; that’s politically toxic’

On Thursday night, one of the coldest nights of what has been a mild winter, a man in his 60s living alone contacted Limerick Fianna Fáil TD Willie O'Dea, seeking help with an application for fuel allowance.

He is one of many seeking help. “It’s a very real crisis, people have been taken aback by the latest energy bill, and there’s plenty of evidence the cost of groceries is going up rapidly,” O’Dea says.

A 40-year veteran of the Dáil, O’Dea knows the dangers inflation poses for any government: “As recently as last night a couple of people in the housing estates were saying to me how are they going to survive week to week,” he says.

While it is influenced by a whole range of factors outside the Government’s control, that is unlikely to matter much to voters. “All they know is their income is able to purchase less and less, and that is powerful, absolutely politically toxic,” says O’Dea.

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For several political generations, no government has had to deal with its causes and consequences, but inflation now risks becoming another bread and butter issue, alongside health and housing.

Fellow Fianna Fáil TD, Kildare North's James Lawless has seen the issue loom sharply since Christmas. "People are naturally trying to reduce [expenditure] in January and manage.

“All of a sudden they’re saying, ‘Oh, my God, this bill is double the cost of last year,’” he says, adding that it is not yet the equal of housing or health, but it is affecting “the squeezed middle” who so far are not as badly affected by the other two problems.

Intervention

Over the past week and a half, since the news emerged that the Coalition was planning an intervention, the impact of inflation on working families and middle income households was a major talking point for Fine Gael in particular. Leo Varadkar repeatedly made the point that people on middle incomes were being hit, and argued for universal payments during the negotiations alongside targeted measures.

That seems to have landed – 75 per cent of the €505 million package is taken up with a universal electricity credit of €200 including VAT, to be paid in April.

Both Fianna Fáil and the Greens were clear that targeted measures for those on low incomes had to form part of the package, and they do, with a lump sum for those on fuel allowance of €125, and a reduction in the drug payment scheme threshold to €80.

However, the combined cost of these measures is €66 million, more than €300 million less than the universal energy payments. An increase to the working family payment and changes to the threshold it is paid at were already announced, but will kick in earlier. Changes to the school transport charges will cost the exchequer only €3 million. The Government will face charges that millionaires are being given a needless subsidy while lower income households struggle.

"Basic economic theory says that you help the people on fixed incomes more than you help the people who can work through changes in inflation," says Stephen Kinsella, professor of economics at the University of Limerick. "They could have targeted the measures to poorer households… the taxpayer is losing the money it gives to me." O'Dea agrees: "There isn't enough focus on the low paid," he says.

The Government's room for manoeuvre was limited by the fact that it wanted to avoid a mini-budget, meaning a whole host of ideas were off the table – firstly, anything to do with tax. Both Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath were said to be stubborn on this point during negotiations: one source said it was an "over my dead body" issue for both.

Negotiations went down to the wire, one senior source said, with options on social welfare and health measures ultimately ruled out because they would have been “in [the] mini-budget space”.

On Thursday the three party leaders and their advisors met Donohoe, McGrath and Minister for Social Protection Heather Humphreys. The goal was to keep the size to €500 million, and to avoid reopening the social welfare or finance bills - and to target measures that wouldn’t spill over into Budget 2023 - things had to be “targeted, timely and temporary”, one source said. The leaks and briefs of measures were a headwind - and halfway through the process, it became, at least in part, about expectation management. Changes to hospital fees, prescription charges and further assistance for students were among the last items to be dropped.

Donohoe was also insistent that the interventions not drive inflation themselves – something Kinsella says was achieved.

“The policy design is quite clever in that it minimises the risk of causing inflation using half a billion of taxpayers’ money.” However, given the volume and variety of options that were briefed out to the newspapers, there is a risk that the package can only be seen to disappoint. Across the past week, just a few of the ideas floated which didn’t transpire included: cuts in hospital and prescription fees, cuts to college fees, a bonus for low income and older people, cutting fees for driving licences and passports, VAT on energy charges and road charges, changes to the taxation of bonuses, the temporary deferral of bill payments, and a dedicated hardship fund.

Rural/urban divide

The one surprise was a cut in Leap Card fees of 20 per cent, a significant win for the Green Party, delivering a public transport measure, especially amid so much focus on the cost of filling a fuel tank. It's expected that Eamon Ryan will likely make an effort to retain the cuts.

It’s unlikely to soothe tensions, however, around an emerging rural/urban divide within the Government that sees flashpoints on environmental and energy policies already, like the carbon tax.

Michael Ring, the Fine Gael TD and former minister for rural affairs, was caustic about the carbon tax earlier this week. "It's rip-off Ireland again," he told The Irish Times on Wednesday, saying that he pleaded with Eamon Ryan and Donohoe not to put an increase in the carbon tax through last year.

“I could see what was happening,” he said. “[Eamon Ryan] is not living in the real world, he’s living here in Dublin. I filled my car and it cost €100. He can cycle in in the morning. And he probably has the car around the corner anyway.”

The Greens strongly reject this: Neasa Hourigan, the Dublin Central TD, says carbon tax accounts for about one-fourteenth of the increase being seen at the petrol pump, and says that calls for it to be stalled are "really cynical" and "bordering on disinformation". Hourigan, however, also has views on what should be done to counter inflation. She called for a range of payment increases and interventions on welfare policy during the week and believes the Coalition may have to do more again.

“Most of the forecasts are that it will be short lived, so I can see why this package makes sense,” she says. However, she’s not convinced that inflationary pressures will be transitory.

“We need short-term, fairly urgent action to make sure people don’t fall into poverty, but we also need longer and medium-term measures,” she says.

The potential for political trouble is clear, given Minister of State Seán Fleming’s hapless intervention this week when he suggested people should shop around to help offset the cost of inflation, for which he later apologised. “You can shop around and get a 1 or 2 per cent decrease,” Hourigan says, “but you won’t be able to bridge the gap between this year and last year.” Fleming’s contribution, she says, was “very unfortunate both in terms of the wording of it and the sentiments it expressed”.

Government is hopeful that inflation will begin to fall by the middle of the year, but a steep descent is seen as unlikely. Wage pressures are expected across the economy, public and private sector, but the prospect of financial assistance to employers to help counteract this is remote. The coalition is of the view that it is in the process of unwinding supports, not putting new ones in place.

Despite the half a billion euro package, the Government is staring down the barrel of yet another problem and inflation looks likely to set the pace for some time to come.