Too big a budgetary package could fuel further inflation, Seán Fleming warns

A “heavy” fiscal intervention in the budget to shield households from the current price squeeze may add to existing inflationary pressures, eroding living standards further, Minister of State at the Department of Finance Seán Fleming has warned.

“Additional measures aimed at domestic sectors, in particular, may fuel further price inflation, causing further negative cost-of-living effects for individuals,” Mr Fleming told the annual meeting of the Dublin Economics Workshop (DEW).

There was a risk that “heavy fiscal policy intervention could negatively impact on price signals which reflect genuine capacity constraints, ultimately distorting these signals”, he said.

“In this way, with Budget 2023, we aim to design an effective policy response to the challenges we face, minimising these potential indirect effects so as to not add to inflationary pressures,” he said.

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Vulnerable households

The Government has been repeatedly warned to tailor its cost-of-living package in the upcoming budget to more vulnerable households amid concern that general financial supports could fuel further price growth.

The budget is expected to contain between €2 billion and €3 billion in temporary, once-off measures to offset the impact of inflation, including a series of energy credits for households totalling €600 per household.

“We are striving to strike a balance between helping to mitigate cost-of-living pressures for households while simultaneously ensuring the sustainability of our public finances, investing in the future of our economy and quality of life in Ireland,” he said.

Untargeted measures

The Irish Fiscal Advisory Council has warned the Government that untargeted measures to shield households, such as energy credits or further cuts in excise duty on fuel, could end up adding to domestic inflation, which remains at a near-four-decade high of 8.7 per cent despite a slight fall last month.

Gillian Phelan, head of monetary policy at the Central Bank of Ireland, told the conference that “the interlocking shocks” of the pandemic and the war in Ukraine had created a different dynamic for inflation.

“That’s why you’re seeing central banks respond very quickly now,” she said. The European Central Bank increased its main interest rate by a record 0.75 of a percentage point earlier this month while signalling further rate hikes were on the way.

In a separate session on income inequality, Lisa Wilson from the Nevin Economic Research Institute compared poverty rates on both sides of the Irish Border, noting that working-age adults in the Republic (after housing costs are factored in) were just as likely to be at risk of poverty as their Northern Ireland counterparts despite the perception that poverty rates were higher in the North.