Ibec warns Government may need to widen budget measures if economy deteriorates

The Government may need to go beyond the measures due to be announced in next month’s budget, particularly in terms of supports to cushion the impact of energy price rises, employers’ group Ibec has warned.

In a pre-budget submission the group recommended a €2 billion package to deal with the high energy costs facing households and businesses here. However, it warned that the path of energy prices, the pace of global monetary tightening and momentum in the broader global economy had become “extremely volatile”.

If the economic environment continues to deteriorate over the winter the Government may need to adopt a more expansionary fiscal stance to protect households and businesses, it said. This could mean rolling out additional supports in the November, December and January period over and above those announced in the budget.

“If things get worse in terms of the cost of energy the Government may need to do more than it announces on budget day,” the group’s chief economist Ger Brady said.

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He said there had been a major fall-off in business sentiment in the last six to eight weeks in response to the worsening energy crisis.

Depending on how high the increases are “you’ll to see more and more households being dragged into energy poverty and the State will have to step in for some, not all households”, he said. The assistance may come in the form of increases to existing allowances or additional energy credits, Mr Brady said.

Up to 70 per cent of households here could be plunged into energy poverty in a worst-case scenario, according to a recent report by the Economic and Social Research Institute (ESRI).

In its submission Ibec said Government fiscal policy needed to remain flexible to changing conditions.

While the Government is expected to generate a modest budget surplus this year there remains a danger of “over-correcting given volatile economic dynamics”, it warned, while noting the inflationary focus must be matched by a focus on the crucial long-term investments necessary to enhance living standards, overall quality of life and economic resilience.

It said it expected consumer price inflation to average 7 per cent this year. It is currently running at more than 9 per cent. Inflation is expected to add about €7 billion to total consumer spending in nominal terms in 2022, it said.

“Rising energy prices mostly flow out of the economy in terms of higher imports but also introduce a relative price shock to consumer spending. This is where households when faced with higher spending on energy bills cut back on consumption elsewhere,” it said.

Separate data from the Central Statistics Office, published on Monday, indicated that the volume of retail sales fell 1.6 per cent in July and were down 8.1 per cent in the year to July.

Ibec criticised the Government’s labour market policy, suggesting the cumulative effects of auto-enrolment, the living wage, pensions, statutory sick pay, and other leave proposals already announced will add 9 per cent to average labour costs over the coming decade. “These costs are on top of the existing significant cost pressures facing Irish companies, with energy, commodity, and transport costs challenging profitability for many,” it said.

While supporting the Government’s commitment to a continued increase in the level of the carbon tax, it said this must be balanced by offsetting incentives for energy efficiency, the adoption of low carbon technologies and alternative energy sources.

“Budget 2023 arrives at a crucial inflection point for the global economy. Catalysed by huge cost pressures and tightening of financial markets, we are facing significant global economic headwinds, with the era of record low interest rates, low inflation, and spare capacity ending,” Mr Brady said.

“As a small open economy, shifts in the flow of capital through the global economy will have an outsized impact on the Irish growth model,” he said. “Our members are already experiencing this through tighter capital markets and rapidly-rising costs. The outlook for Irish business is marked by growing concern at rapid shifts in our competitive position. This underlines the importance of controlling what we can here at home in Budget 2023,” Mr Brady said