The Government faces some tricky decisions on budget policy this year, assuming a general election is not called before then. The crux of the issue is the future of a range of general financial supports to households put in place during the cost-of-living crisis. As inflation eases, there is a strong case to wind down many of these and focus ongoing supports on those who really need it. But, with a general election approaching, there will be strong political arguments to keep the money flowing.
The debate is brought into sharp focus by the publication of advice to the Government from the Central Bank that the scheme of mortgage interest relief introduced in the 2024 Budget was badly focused. It said the vast bulk of the gains will go going to older borrowers, least likely to have any difficulty repaying their loans. Despite this – and reservations from Department of Finance officials – Minister for Finance, Michael McGrath went ahead with the plan in the budget, saying that the relief would apply for only one year.
The political pressure to do this resulted from the sharp rise in interest rates during late 2022 and 2023, which led to sharp repayment increases for many borrowers. Sinn Féin had called for a temporary scheme for some time and the Government decided to go ahead with its proposal in the budget. It was a mistake, given that the vast bulk of the money was going to a group which, while suffering significant increases, had benefited from rock bottom borrowing costs for many years. They were thus not among the most exposed as interest rates rose.
Sometimes the Government does need to step in, for example with the supports during Covid-19, or for households worst hit by higher energy costs. But particular care needs to be taken in measures which apply more generally, such as the mortgage relief scheme or the general household energy supports.
Big decisions lie ahead in these areas this year. The rate of inflation is falling and energy prices are coming down. So, almost certainly, are tracker mortgage interest rates. The question for the Government is whether to continue the general household supports, or to end them.
In terms of the mortgage scheme, there will undoubtedly be calls to continue it, which the Central Bank warned is likely to push up house prices further. Meanwhile, there will be political pressure within the Coalition to continue supports such as those for household energy spending, despite the downward trend in bills .
There is a case to consider what supports are needed by those worst affected by the rise in prices - after all, the cost-of-living will remain high, even as inflation eases. But the more general supports need to be withdrawn; otherwise the Government will stand accused of trying to buy the general election.