Government faces tricky ‘balancing act’ in trying to help households, Ifac says

The Government faces “a delicate balancing act” in supporting households and avoiding adding to “second-round inflation”, the head of the Irish Fiscal Advisory Council (Ifac) will tell the annual meeting of the Dublin Economic Workshop (DEW) on Friday.

Sebastian Barnes will also warn that the State faces significant headwinds over the coming decade in the form of slower growth, having to budget for an ageing population and the green transition while addressing the State’s over-reliance on corporation tax. “The political system will need to make more difficult choices than it has had to face — outside crisis times — at any point over the past generation,” he will say in his speech.

Mr Barnes, who is due to give the keynote address on the opening day of the conference in Co Wexford, will call on the Government to be more targeted in its approach to addressing the current price squeeze. The Government is planning a major cost-of-living package in the budget with up to €2 billion in temporary, once-off measures to offset the impact of inflation.

However, Mr Barnes will tell the conference that untargeted measures to shield households, such as energy credits or further cuts in excise duty, could end up fuelling further domestic inflation, which is at a near four-decade high of 8.7 per cent. The Government’s package is expected to include a series of energy credits for households totalling €600.

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In his address, Mr Barnes will look back over the State’s recent economic history and ahead to the next decade.

“Budgetary policy in Ireland has a history of pro-cyclical behaviour: lowering taxes and raising spending in good times only to see a destabilising reversal of this during downturns,” he says. However he notes that the management of the current energy shock is being supported by the introduction in 2021 by the Government of the 5 per cent spending rule, which aims to grow core spending at a steady pace.

“While the Government has sensibly allowed some temporary leeway from the 5 per cent in view of exceptionally high inflation, the rule is providing a useful signal about how to respond to the shock. It is now important that the budget sticks to that commitment,” he will tell the gathering.

There are hopeful signs that Ireland may have broken with the damaging economic management of the past, he will say, while raising concern about whether Irish fiscal institutions are strong enough for the years ahead.

Mr Barnes believes the next decade will look very different from the pre-Covid years, “where the rapid growth, falling interest rates and surging corporation tax receipts created favourable tailwinds for the public finances”.

“Ireland now faces slower long-term growth, an ageing population, the cost of cutting emissions and the need to reduce over-reliance on corporation tax,” he will tell the workshop.