All around the world, signs of rampant inflation are evident. In the United States, gasoline prices hit a record $5 a gallon last week, a major psychological barrier for car-loving Americans. In Britain, inflation is touching 10 per cent and the Bank of England has warned that it is heading for recession.
The European Central Bank last week signalled its first interest rate increase in more than a decade, likely starting with a 0.25 per cent rise in July. With further rises likely later in the year, Irish mortgage-holders will face increased borrowing costs. Consumer prices here rose by 7.8 per cent in May, according to latest data from the Central Statistics Office. That’s the highest level in 38 years. Diesel and petrol are now trading at more than €2 a litre, in spite of the Government’s recent cut in excise duties.
The short-term outlook remains grim, with no sign of an end to the war in Ukraine and tough sanctions on Russia leading to surging energy costs and supply chain disruptions. The summer should at least offer some respite to householders from soaring bills but the inflationary backdrop will result in some difficult choices for the Government as it begins to frame Budget 2023.
On Friday, Minister for Finance Paschal Donohoe said there were “limits” to what the Government can do in the face of the cost-of-living crisis. It has already put through measures that will cost about €1 billion this year. Donohoe signalled that any further reliefs would come in October’s budget rather than sooner. He also warned that those who are calling for tax cuts should remember that these taxes pay for vital public services.
Ironically, one of those advocating for tax cuts is his party leader and Tánaiste Leo Varadkar, who appears to be in electioneering mode and has signalled his desire to provide some relief for the squeezed middle. His comments come as national pay talks involving unions and employers kick off in earnest.
The Irish economy is an unusual animal. Multinational activity here continues to thrive, as it did in the pandemic, meaning that, in technical and GDP terms, the economy here is not in danger of slipping into recession. Just last week the OECD said Ireland would grow in GDP terms by 4.8 per cent this year and by 2.7 per cent next year.
However, the domestic economy is feeling the pinch, with many households, particularly those on low incomes, finding it difficult to make ends meet. With high levels of inflation set to be a feature for some time to come, the Government will have difficult choices to make in the budget.
Healthy tax revenues from record levels of employment and soaring corporate tax receipts offer headroom for additional spending in the budget. The priority should be to protect those on low incomes and the most vulnerable in our society, and to invest in vital public services.