The cost-of-living crisis continues to dominate political debate and poses a series of interlocking dilemmas for the Government. As Ministers have insisted, there is no way the State can fully protect everyone from the impact of higher prices. Yet Ministers are also dropping hints about what might be expected on Budget day in October – in part to try to relieve the political pressure to take further action before then.
The wider economic backdrop remains reasonable, for now anyway, with the ESRI’s latest quarterly commentary predicting another year of decent growth. But under the surface much is changing. And as the ESRI itself says, any forecasts now are surrounded with uncertainty. Threats of further fallout from the war in Ukraine moving into next winter remain all too real.
So what should the Government do? The key point is that budget measures must be targeted directly at those who need help, mostly via the welfare system. There are various ways this can be achieved, but the budget needs to be based first on a realisation that many households cannot now make ends meet and that this may worsen heading into the autumn.
Indeed, whether action can be delayed until Budget day in this area remains an open question. Some earlier moves may be justified. Helping wider society is more complicated, partly because of cost and partly because of fears of fuelling inflation and embedding it in the system.
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A public pay agreement would be preferable to no deal, but cannot fully match inflation. Fine Gael leader Leo Varadkar talks of tax cuts, but really what may happen here is adjusting the income tax system so that people do not face a higher tax take as wages rise. The trade unions are pushing for moves on the “social wage” – expanding social entitlements and spending in areas like childcare and health to bolster living standards.
There are short and long-term considerations here. In the short-term, tax revenues will probably remain buoyant, though economic growth will surely slow heading into the autumn. Thus, there are resources to act – within certain limits. The longer-term outlook is more clouded. The State has a lot of bills facing it in the years ahead, beyond coping with the current emergency, notably to deal with an ageing population, housing demands and the need to accelerate climate change policies.
These are likely to require higher tax levels, particularly if the surge in corporation tax receipts eases or even reverses. A key challenge is to marry short-term actions to these longer-term goals and realities. The era of zero-interest rate State borrowing is over and will not return. This calls for clear prioritisation in tackling the cost-of-living crisis and an honest debate on how to pay for longer-term priorities.