Government should move away from one-off payments in budgets, says ESRI

The Government should move away from providing one-off payments to households now that inflation is moderating and wages are growing strongly, the Economic and Social Research Institute (ESRI) has said.

The institute also said Minister for Finance Michael McGrath could have set aside more of the State’s windfall taxes for the two new long-term investment funds he announced.

Appearing before the Oireachtas Committee on Budgetary Oversight, ESRI officials said policymakers should consider benchmarking social welfare payments “to provide more certainty to those dependent on them” instead of providing one-off universal payments to households such as energy credits, which in many cases go to those who do not need them.

The Coalition announced a €2.7 billion package of temporary measures in last week’s budget, which included three energy credits worth a cumulative €450 per household, a double childcare payment and a renters’ credit worth €750.

The ESRI’s Karina Dooley said the think tank’s annual impact assessment of the budget indicated the measures would “result in average gains to real income for households next year” of approximately 2 per cent “with higher gains for low-income compared to high income households”.

It would also result in reductions in the at-risk-of-poverty rate of most groups, she said, noting this was “accomplished mainly through the temporary measures in the budgetary package”.

Nonetheless, she said: “With inflation moderating and wages growing strongly, policymakers should now consider moving away from one-off payments and benchmarking social welfare payments to provide more certainty to those dependent on them.”

The effective freeze to thresholds for more generous means-tested supports through the National Childcare Scheme may result in lower-income households who experience wage inflation receiving less support with their childcare costs, she said.

Ms Dooley also warned that the budgetary package as a whole “does risk adding to inflationary pressures”.

She welcomed Mr McGrath’s decision to establish two State investment funds but queried the amount of corporate tax receipts being set aside, suggesting it was modest in the context of a record €22.6 billion haul last year. Mr McGrath announced plans to divert approximately €6 billion of exchequer resources each year into the funds ― €4 billion into the new Future Ireland fund and a further €2 billion into a separate infrastructural fund.

The funds are designed to pay for the additional health and pension costs associated with an ageing population and to ensure infrastructural spending does not get cut in the event of an economic shock.

The level of receipts being earmarked for the two funds represents about 54 per cent of what the Department of Finance has classified as the windfall element of corporation tax receipts.

“These funds set a positive precedent in terms of providing for future liabilities, such as ageing and the climate transition but also providing targeted funding to deal with capacity constraints,” Ms Dooley told the committee. “However, it could be argued that a greater level of windfall transfers could have been made to the funds,” she said.

Ms Dooley also warned that “the specific deployment of the infrastructure capital”, coupled with investments under the National Development Plan, will have to be cognisant of short-term inflationary challenges while attempting to deal with capacity bottlenecks.

Will co-hosting Euro 2028 be of any real benefit to Irish football?

Listen | 48:25

The economy was set to experience more moderate rates of growth on the back of a slowdown internationally and as the domestic economy runs up against capacity constraints, the most obvious one being full employment, she said.

“The Irish economy emerged in a strong and resilient manner post the Covid-19 pandemic but it now looks set to experience more moderate, normalised, rates of growth,” she said.

This moderation of economic growth is coming through two differing channels.

“First, the international economy is weakening, inflation remains elevated, interest rates have continued to increase and demand in countries such as Germany and, in particular, China, has faltered,” she said, while noting ongoing geopolitical tensions and a reappraisal of international supply chain linkages were also providing headwinds for international economic integration and trade.

Ms Dooley said the domestic Irish economy was operating at capacity, in particular in relation to employment-intensive sectors like construction. While the Irish labour market continued to perform robustly, additional domestic pressures were likely to feed through to prices in the short term, she said.