Jim Power: Spend surplus on infrastructure not populist cost of living measures

There is obviously a strong political temptation to throw money at every problem

Mon, 06 Jun, 2022 - 02:00

Inflation continues to dominate economic discourse around the world, and with good reason.

Last week we saw inflation in May hit a new high of 8.1 per cent in the Euro Zone. The annual rate of price increase is running at 20.1 per cent in Estonia, but a rate of 8.7 per cent in Germany must be causing considerable indigestion. Not surprisingly, energy continues to be the biggest driver of price pressures across the euro area, with an annual increase of 39.2 per cent in energy costs in May, up from 37.5 per cent in April.

Of course, with the latest EU sanctions on Russian energy imports just announced, it seems likely that energy costs will continue to rise over the coming months and this will keep inflation at elevated levels. Food also threatens a lot of inflation.

Hopefully, the powers that be and indeed the ordinary souls across Europe now realise just how dangerous it is to have such an energy dependency on a country that cannot be trusted, putting it mildly. I am hearing that in Finland, political opposition to wind energy projects has collapsed and its latest nuclear plant is about to be opened. The rest of us across Europe should be equally determined to create alternative forms of energy that will eventually eliminate Russia as an energy supplier.

Ireland of course does not import very much if anything in the way of energy from Russia, but indirectly through global energy markets we are very vulnerable to Russian energy developments. For the NIMBYs out there opposing the development of wind energy and solar farms and anything that represents a move away from imported fossil fuels, they should really think long and hard about the implications of the resistance to alternative forms of energy.

On no basis do wind and solar represent the total solution to our problems, but they should form a significant part of a portfolio of energy sources that would reduce our dependence on imported fossil fuels. Nuclear is the most obvious option, but that is strictly verboten in this country. No energy source is trouble-free, but we will have to make choices and accept that trade-offs will have to be made. If the EU import sanctions are ratcheted up significantly, we could be in for a difficult period that might just deliver the change in mindset that the Finns are apparently going through at the moment.

A perusal of global economic, financial and political indicators at the moment could make one very concerned about the future. Despite this, the economic news out of Ireland continues to surprise on the upside. The latest Exchequer returns demonstrate once again that Ireland is a ‘mean, lean, green tax-generating machine’.

In the year to the end of May, the Exchequer ran a surplus of €1.4bn, which compares to a deficit of €6bn in the same period in 2021. The turnaround of €7.4bn is due to ongoing strong growth in tax revenues and reduced current expenditure as the Covid-19 supports are being phased out. Overall tax revenues totalled €30bn which is 26.9 per cent or €6.4bn higher than the equivalent period in 2021. The early months of 2021 and 2020 were distorted by severe Covid restrictions, which exaggerates the annual growth rate in 2022. However, when compared to the first five months of 2019, tax revenues in 2022 were €8.4bn or 38.5 per cent higher. Income tax, VAT and Corporation tax are all expanding very strongly, which tells us a lot about the current momentum in the economy.

In the face of such tax revenue buoyancy, there is obviously a strong political temptation to throw money at every problem, and we have certainly seen this in relation to some of the more ridiculous cost of living measures.

While we have near-term challenges, I think it would be great to see the Government take a more strategic approach and use the super-normal tax revenues currently being generated to invest in long-term infrastructure programmes in areas such as health, energy, water, education and public transport.

These are the sorts of areas that will help guarantee longer-term economic success and resilience when populist cost of living and other spending measures are long forgotten.