State cannot repeat Covid supports as prices surge

The Government took the unprecedented step of nationalising a significant portion of the private-sector wage bill during Covid. The rollout of wage supports during the pandemic accounts for most of the overall €27 billion bill we drummed up during the period.

Those supports shielded households from the worst of the slump, triggered a surge in savings and are one of the main reasons for the rapid bounce back in demand and activity that we have been experiencing.

They are also factor in the current inflationary surge. Demand flooded back too quickly for weakened or broken supply chains. The Government’s unprecedented actions have also created an unrealistic expectation around what the it can do to shield households from the escalating cost-of-living squeeze.

With only four weeks to go to Budget 2023, the Irish Fiscal Advisory Council (Ifac) weighed into the debate this week, suggesting any measures to insulate households against rising prices, especially for electricity and gas, need to be more targeted while cautioning that longer-term pressures on the public finances due to ageing, climate goals and the sustainability of certain tax revenues are also mounting and must be factored into the Government’s budgetary response.

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At its core, Ifac’s message is that the Covid approach of throwing the kitchen sink at the problem is not appropriate for various reasons, not least because the inflation shock may not be temporary. Hence the Government should focus on helping those most in need rather rolling out general measures like energy credits or cuts in excise.

To fully track expected wage and price increases this year and next, expenditure would have to be increased by almost €7.5 billion in Budget 2023, the watchdog said. This would increase core spending to €100 billion by 2025, 50 per cent above 2019 levels, raising further questions about the sustainability of the public finances, particularly in the context of those longer-term spending pressures.

As Goodbody chief economist Dermot O’Leary said in a note on Wednesday: “The full cost of the spike cannot be borne by Government. It can only ease some of the pain for those households and businesses that most need it to survive financially.”