Government cannot chase inflation, Donohoe warns ahead of budget

“Chasing inflation” could result in far bigger problems for the economy, Minister for Finance Paschal Donohoe has warned. “We must provide the necessary assistance to those in need but without adding fuel to the fire of inflation,” he told the Oireachtas committee on budgetary oversight.

“As we learned in the 1970s, chasing inflation can result in far bigger and more structural problems in the longer-term,” Mr Donohoe said.

Minister for Public Expenditure Michael McGrath also warned that budgetary policy must not become part of the inflation problem and that the Government’s approach to the upcoming budget would be “responsive to the challenging economic environment but also fiscally sustainable”.

The Coalition is expected to unveil up to €2 billion in temporary, one-off measures to cushion households from the current price squeeze. The measures are expected to include a series of energy credits for households totalling €600. However, Sinn Féin has called for up to €3.8 billion in spending on temporary cost-of-living measures, including a cap on energy bills until the end of February.

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Mr Donohoe said the current surge in energy prices had created a “deeply uncertain” period for the economy. “For a brief period at the start of this year the prospects for the Irish economy appeared to be bright. But no sooner had we turned the page on the pandemic than the Russian invasion of Ukraine upended the economic situation and outlook,” Mr Donohoe said.

He warned that the reduction in purchasing power arising from the inflation would dampen consumer spending over the coming quarters, “while increased uncertainty and weaker external demand will also see firms hold back on investment”. As a result, Mr Donohoe said his department would be revising down its growth projections in the upcoming budget.

However, he said the economy was facing into these challenges “from a good starting point” with a 2.5 million people in employment, the highest level on record, and unemployment at a near record low of 4.3 per cent.

Mr Donohoe noted that much of the recent surge in tax revenue is due to windfall corporation tax receipts, which amounted to nearly €12 billion over the first eight month of the year. The Department of Finance now expects business tax receipt to top €20 billion this year. However, he warned the surge in corporate tax revenues was disproportionately concentrated among a small handful of firms. “Just one of these firms leaving Ireland would be a significant blow to our tax revenues. To put it bluntly: the future growth of corporate tax receipts is not a one-way bet.”