The Government is finalising what is certain to be a controversial cost-of-living package, deciding what measures to extend, which ones to end and whether any new initiatives are needed. It is politically difficult because even though the rate of inflation is easing, the actual level of prices facing households remains high and will continue to do so. So what will the key decisions mean for household incomes?
1. Energy supports
Wholesale energy prices have swung hugely over the past year and gas prices are now back to pre-Ukraine war levels on both the UK and EU markets – which tend to roughly track each other. However, they remain at roughly three times the level that applied before energy prices started to rise in 2021. The recent decline has contributed to a fall in wholesale electricity prices, which fell sharply towards the end of last year.
Two factors are set to delay any fall in prices for households. One is that prices remain well above recent historical norms and energy companies argue that they did not pass on the full impact of last year’s prices to consumers – hence, they say, the case for declines remains limited. Second, energy companies purchase fuel ahead of time on the markets to secure supply. So purchases based on last year’s wholesale prices will take some months to work their way through the system.
Some fall in bills later this year may be on the cards, but the key issue for Government is that energy bills look set to remain well above what applied for many years up to 2021. The likely responses fall into two areas – targeted and universal – both still to be decided on.
One is additional energy credits for all households. A total of €600 in energy credits was announced in the budget last October, with the final €200 of those to be paid in March. Either an additional €200 will be paid in May, or the Government may commit to reconsider the issue later in the year , perhaps indicating another payment heading into next winter.
The latter route is likely to be supported by the Department of Finance but this will be a key part of the overall trade-offs. Each €200 credit costs €400 million and so this reduces room for manoeuvre elsewhere.
The second response will be once-off welfare measures targeted at less well-off households, pensioners and possibly families, via child benefit. The budget announced double payment weeks for welfare recipients, pensions and the 639,000 families receiving child benefit and once-off payments for a range of groups such as carers, people with disabilities and those on fuel allowances. The cost-of-living package next week will see some similar special measures, though they will not be as extensive. Where to target will be another key political call.
Lobby groups and Opposition parties are arguing for permanent income boosts for some of these groups via higher core welfare rates, but for now the Government looks set to stick to temporary measures, returning to the issue of base welfare and pension rates in the next budget.
2. Fuel tax
This is a real hot-button issue, particularly for rural Ireland. Excise cuts worth 20 cent on a litre of petrol and 15 cent on diesel that have been in place since last March are due to run out at the end of February.
To make matters worse, a National Oil Reserves Agency (Nora) levy, worth another 2-3p per litre, which was suspended in the last budget to soften the carbon tax rise, is due to return at the same time.
The Green Party is arguing strongly that the Government cannot be subsidising polluting fuels but, politically, a sudden hike in prices is not seen as a runner. It is understood that a compromise that would see the missing excise duty phased back in is under discussion, but how quickly remains uncertain. There are suggestions that the incentive could be phased out over the rest of the year. This will put some gradual upward pressure on fuel prices - what happens to wholesale prices will also be key.
A call will also have to be made on the extension of the lower 9 per cent VAT rate applied to gas and electricity bills. This looks likely to be extended in some form, given these bills remain so high, though there may also be indications of an end date or a phasing out strategy.
3. The 9 per cent VAT question
Signals had been that the 9 per cent VAT rate on accommodation and food would go back to 13.5 per cent at the end of this month. If this happens, it is hard to say how much of this would be absorbed by the industry, but tight profit margins mean it would be bound to lead to some increase for consumers, if restored. As well as accommodation and restaurants, the hairdressing sector has warned its prices would have to rise.
The indications last weekend were that the rate would return to 13.5 per cent, as the Department of Finance was arguing that it was fast become a permanent fixture. However the industry is lobbying hard – garnering Government backbench supports – and the outcome looks to remain in the balance.
This is a big item – it would cost around €500 million to extend the rate until the end of the year. If the rate is not being increased immediately, a compromise might be to retain it for this summer season, or have some kind of phasing out strategy. The Revenue Commissioners have warned that retaining it for eating out but ending it for accommodation would be technically difficult.
4. Affordability
Can the Government afford this? In the short term, yes. The exchequer beat its financial targets last year and this will carry through to a better outlook for 2023 than outlined on budget day. The Government also has money set aside in various contingency funds – apart from the new National Reserve Fund. So it will have leeway for a package and this would have been specifically considered last October by Ministers Paschal Donohoe and Michael McGrath who have subsequently swopped jobs.
Revenue from a special windfall tax on the profits of some energy companies – set to raise several hundred million euro – will also help pay some of the bills.
But remember that the budget was framed on the basis that the excise relief on fuel and the 9 per cent VAT rate would end on February 28th. So retention involves cost and the amounts are significant – over €1 billion were all the tax relief measures to be retained.
The two ministers will not want to enter into new permanent commitments as they will fear this would leave the public finances exposed in the years ahead, particularly if corporation tax revenue declines for any reason. McGrath has argued that the public finances need scope to respond later this year to problems that emerge and so wants leeway to do this.
A key political problem here is that the hit to living standards from higher prices is likely to linger – even if inflation falls, prices will remain high. So McGrath and Donohue will face ongoing pressure to adjust core welfare and pension rates and introduce permanent supports in the run-up to next October’s budget.
Sinn Féin is also pressing for relief for mortgage holders via the reintroduction of mortgage interest relief. While the Government is unlikely to go down this road, it will face political pressure in the months ahead, particularly in relation to the 38,000 mortgage holders who had their loans sold to vulture funds and have been identified by the Central Bank as now facing high interest rates with no option to switch to a fixed-rate loan.
The second key issue in terms of budgetary management is staying within departmental spending ceilings set out on budget day. It is unclear, given spending trends since budget day, what level of leeway there is here. But this will be vital in late minute discussions.
5. What about the economics of this?
The economics of this comes down to three key issues. One is that, ideally, supports for a squeeze on the cost-of-living should be temporary – as happened during Covid-19. However, the problem is that, unlike Covid-19, when the end of restrictions gave a natural point to end supports, there is no similar end point to the cost-of-living crisis.
The second issue is not fuelling inflation. If supports which helped keep energy prices down are removed, these prices will be higher than they would otherwise have been and so will the rate of inflation. On the flip side, adding more cash back in via universal supports in particular could arguably fuel spending and inflation.
The third key issue is not wasting State cash by giving it to people who don’t really need it. The Government has said that as well as targeted measures, it will introduce universal supports – Taoiseach Leo Varadkar has repeatedly said that the middle class must be helped. However universal measures such as the €200 credit or tax cuts which lower fuel prices also assist better-off households who don’t really need such help. Economists call this a deadweight loss.
There is a lot to consider and the length of time it is taking ministers to decide points to the political and economic complexity of combating the cost-of-living crisis.
