Everyone has felt them. You couldn’t miss them: the pandemic, followed quickly by the Ukrainian invasion and the associated cost-of-living crisis. Throw in the rise in migration for good measure. With the continuing war in the Gulf sending prices skyward, it feels very much like we are standing on the threshold of another shock.
Responding to volatility is now a core competence for Government. And the pervasiveness of shocks has an effect on the structure of Irish politics: how do you do politics – particularly budget-making – in a world where emergency responses are the new normal?
In the first instance, there is planning the immediate response. After the announcement of the Government’s €250 million cost-of-living package, there are three interdependent questions for Irish policymakers: how long will it last, how bad will it get and what will they do about it?
At the moment, discussions at the top level of Government envisage a best-case scenario where bombing stops within a month and everything returns to normal about 2-3 months after that.
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The longer things go on, the greater the drag on the domestic economy. Internal Government figures estimate that for every percentage point of inflation, modified domestic demand (measuring activity in the real economy) drops by 0.5-0.75 per cent. Put simply, life gets harder for people as paycheques stretch to cover more. If the situation persists, it’s hard to see the current measures (costing in the region of €100 million plus a month) being lifted.
The worst-case scenario envisaged by Irish planners is for a lasting conflict, boots on the ground and destruction of major pieces of energy infrastructure across the Gulf. That would probably mean a structural shift to higher oil and gas prices: higher energy costs, higher cost of living and some sort of meaningful recalibration of how the State taxes energy and supports the most exposed households and businesses. At a global level, this could trigger ugly moments as markets get increasingly nervous about how governments finance themselves.
But the frequency of upheaval also poses more profound questions.
Through each of the aforementioned crises, policy has been formed at breakneck speed, often with dramatic fiscal or policy responses, with the overriding fear that something even worse could be coming down the tracks.
If the prevailing theme for policymakers in the last six years has been a scramble to meet the moment, the other side of the coin has been exchequer returns that have enabled this response.
In sharp contrast to the austerity years and the deep caution of the Brexit period, billions have been shovelled into the economy in short-term measures. That has gone alongside a secular expansion of services, income tax cuts and a creep in spending across government departments that serially leads to budgets being busted and topped up outside the budget cycle. This is not normal.
One of the first things the new Coalition did last January was signal a return to the old normal when it came to spending: underpinned by a binding medium-term fiscal framework, and a zeal from the Department of Public Expenditure (whose instincts were so often sidelined during moments of crisis), there would be no once-off payments. Ministers would have to hold the line on their budget allocations. Hard choices would be made and stuck to – for example, the return to 9 per cent VAT rate for hospitality meant no income tax cuts.
If it continues, the current crisis may put these two imperatives – a doctrine of spending to protect taxpayers and a commitment to fiscal discipline – on a collision course. It has already shown that the overriding politics of the moment can’t accommodate a total reversion to rigid adherence to the budget cycle. But what comes next will be telling.
If, for example, spending continues across the summer, will the scope for new measures be reduced come October? How will that play out as the budget hovers into view and Ministers bring their shopping lists forward? Hard choices and trade-offs may be deemed necessary – but they would not be popular.
And if supports expand, what form will that take? There is hostility within the Coalition to universal measures such as electricity credits, but the Department of Public Expenditure is allergic to every department getting a cost-of-living package – money to be sluiced out through reductions in things such as exam fees or public transport fares. Withdrawing these measures becomes a political battleground as Ministers try to hoard what was once temporary. So, targeting through the welfare system seems more likely. But although this might be cleaner, it wouldn’t necessarily be cheaper, nor simple to withdraw.
Measures are also being considered to try to overlay some structure on top of the volatility. Consideration is being given in the Department of Finance to using what are being termed “corridors” – pre-agreed policy responses to an external trigger. So, for example, if the price of oil goes to a certain level, excise comes down.
One shock is hard enough – but rewiring the system for a world in which they are the rule, not the exception, is the real underlying challenge.
