Cliff Taylor: Tough winter ahead, but the economy can get through this crisis

Economically, the winter will not be easy. The economy is slowing already under the weight of the energy crisis. Given the hit to people’s incomes, how could it not be? The budget forecasts predict a period of slow growth and high inflation moving into 2023. Huge uncertainties surround energy prices. Economically, socially and politically this will all be fraught.

But the State has enough resources to protect those who are worst hit — for now anyway — and is doing so. And the strong position of the public finances and the economy’s resilience provide a basis for getting through a turbulent period, even if we can’t be sure exactly what it will bring. Ireland is not the UK — undermined by its plan to tackle the crisis and slash taxes. Neither are we Germany, able to announce €200 billion in new borrowings without the markets batting an eyelid. But we are in a decent position and have the resources to cope for the next year or two anyhow.

The initial analysis of the budget by the Economic and Social Research Institute (ESRI) is important because it is based not on static calculations of how the measures affect imaginary families, but on an actual model of what the population looks like. And this shows that the €11 billion combination of once-off and permanent measures is enough to safeguard lower income earners through this winter — and that the measures offer them the most protection. This, then, is money well spent.

Even when inflation eases, the whole economy will have moved to a different price level and so problems for households will persist

The issue with once-off supports is in the name, of course. The boost to households will have run out by next spring. And one really striking part of the budget forecasts was the prediction that the rate of inflation would be more than 7 per cent next year, in excess of twice previous estimates. Even when inflation eases, the whole economy will have moved to a different price level and so problems for households will persist. The level of prices in the fourth quarter of next year is forecast to be a full 13 per cent higher than the first quarter of this year.

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[ Cliff Taylor: High-price pain for households will linger even when inflation eventually eases ]

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The ESRI analysis shows that as temporary measures run out, less well-off households in particular could be vulnerable next year. Permanent welfare increases and tax gains in the budget for what might be called lower-middle income households were below expected inflation. To combat this, it is likely that more once-off payments may be announced next year and temporary support schemes extended. The Government presumably has in mind a Covid-19 model — remember how supports like the Pandemic Unemployment Payment and the wage subsidy scheme were extended as the pandemic rolled on? The political problem will be that the ending of restrictions gave a clear reason to close the pandemic supports, while next year will have no such marker unless we see a sharp reduction in wholesale gas prices.

And if this is going to drag on, then new thinking beyond temporary cash supports may be needed. The Government was right to reject a full energy price cap for households which would have been too risky and given no incentive to cut energy use. But other ideas are emerging — such as in Germany where they look set to guarantee the price of a basic level of energy supply and let households pay full price on the rest. This offers some protection, while still encouraging people to save fuel — though it remains to be seen how the sums all add up.

Budget 2023: What it means for businesses and taxpayers

Listen | 41:03

The course of the war in Ukraine could still throw all plans out the window, of course. In this context, the decision by budget Ministers Paschal Donohoe and Michael McGrath to build reserves all over the place into the 2023 Budget in this context were essential.

The decision to rename the rainy day fund as the National Reserve Fund was designed to avoid the political charge that it is lashing already and the money should be spent. And Donohoe and McGrath will not have been happy with Tánaiste Leo Varadkar popping up on Morning Ireland the day after the budget and more or less promising to deploy this reserve fund next year if needed for further household and business supports.

The two budget Ministers would hope to deploy other money, if needed, and hold the fund for future years. A budget surplus of €6 billion is forecast for next year and could be run down, while there are other contingency funds in the wings and a pile of cash held by the National Treasury Management Agency (NTMA). The public finances will tighten at some stage — but it might not be next year. Already you would bet that the corporation tax forecast of €21 billion for this year will be overshot.

A world recession of some sort looms and the budget forecasts see the domestic economy effectively flatlining for much of 2023

It is a measure of the strength of tax revenues, notably but not exclusively corporation tax, that Donohoe and McGrath were able to simultaneously have an €11 billion package of measures, keep the budget in surplus and plan to put €6 billion away in a reserve fund. Meanwhile, the NTMA folded its tent with no new borrowing needed this year and with a massive €35 billion of cash in hand. For now, the public finances are rock solid.

History teaches us how quickly the public finances can turn, of course. The exchequer’s borrowing position is the difference between two massive numbers. A world recession of some sort looms and the budget forecasts see the domestic economy effectively flatlining for much of 2023, meaning tax revenues are unpredictable. But the resources are in place to cope with more pressures in 2023.

The pity is that a lot of spending over the past few years has been redirected — correctly — to emergency supports, rather than being used to give a push to key priorities in areas like housing and health. That is one of the enduring costs of what we are going through. Protecting this vital longer-term spending through the turbulence ahead remains vital.