John FitzGerald: Betting on once-off energy price supports could prove foolhardy

Coming into this budget, the Government, like others across Europe, had to deal with a major economic shock in terms of the surge in energy prices, which makes Ireland about 3 per cent worse off in the current year. However, for Ireland, the negative effects are substantially offset by exceptional corporation tax receipts, above what had been anticipated.

The Department of Finance’s projections assume that, while gas prices will eventually recede from their peak, they will remain permanently higher than in the past. Cheap Russian gas, delivered through a pipeline, will have to be replaced by LNG, using more expensive delivery mechanisms. Thus talk of the support for energy consumers being “one-off” may prove optimistic, and measures provided in this budget, such as supports for fuel bills, may be hard to wind down.

The Department of Finance fears that almost half the revenues from corporation tax could eventually prove ephemeral. As a result, as reflected in the budget, it would not be appropriate to use all the windfall revenues this year to fully offset the hit from energy prices. The Government plans to save some of the revenue as an insurance policy against possible future loss of revenues.

Protecting the vulnerable

The Irish Fiscal Advisory Council (Ifac) had warned the budget needed to avoid making inflation worse by adding to demand in an economy at full employment. At the same time, it advised to protect the vulnerable from the consequences of the exceptional rise in energy prices. This budget involves more expenditure than Ifac had envisaged, but some of this slippage is due to inflation proving higher than forecast. Thus protecting the vulnerable warranted higher expenditure than seemed necessary a month ago.

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European countries have adopted a range of different strategies to try to support households and cushion the impact of the energy price shock. The best approach, as recommended by the International Monetary Fund, is to provide targeted help to those on lower-than-average incomes. The least appropriate policy, adopted by France and the UK, is to cap energy prices.

An electricity price cap is particularly wasteful because it gives more to those who consume more, generally better-off households. As the Government is paying any excess above the price cap, it may encourage suppliers to raise the price. It also offers little incentive to households to minimise their electricity usage.

The Government in the budget committed to pay lump sums to all electricity consumers. While not as good as a targeted support, it is better than a price cap as it does not favour the rich. It leaves households an incentive to consume less electricity and save money, if they so wish. In addition to this universal support, there is also significant targeted support provided to low-income households through the welfare system, including higher fuel allowances.

Worse off

While the tax and welfare changes offer relief to a wide range of households, neither tax bands nor welfare rates are being indexed fully to inflation. As a result, everyone will be somewhat worse off due to the high rate of inflation. This reflects the reality that Ireland as a whole has become worse-off, through paying more to the overseas suppliers of our energy needs.

While an even greater focus on low-income households would have been better, our budget’s tax and welfare changes are tilted towards those on lower incomes, unlike the recent UK mini-budget. Official estimates are that the combined effects of the tax and welfare measures will benefit those on lowest incomes by 5.5 per cent to 6 per cent, while the richest 10 per cent will get just 2 per cent.

The least satisfactory aspect of the budget is the scale of its support for business, at €1.4 billion. While it would be sensible, as during the pandemic, to support business to weather a temporary storm, high energy prices are likely to persist. Business will need to adjust to this new reality. It does not make sense to support those companies to carry on if they are unable to adapt to a world where energy will be more expensive.

There could yet be significant slippage from this budget’s targets. If the likely realistic costs of health have not been factored in, health overruns will be inevitable, changing the overall budget arithmetic.

Given that gas prices will probably remain at an elevated level for a number of years, measures, whether on the tax or the spending side, that have been billed as once-offs, may be difficult to unwind, particularly as we come closer to the next election. With our tax-take so dependent on just 10 companies, that’s a risk.