ESRI: Finances in good shape to fund any new household inflation support

Next week's exchequer returns will determine if the Government will need to hike taxes to mitigate Ireland's soaring cost of living

As energy, utilities, and groceries soar in price, Ireland's healthy public finances should provide scope for the Government to help vulnerable households, according to Prof Kieran McQuinn.  Stock picture: Julien Behal/PA

The Government’s finances are in good enough shape to finance any new round of measures to fight inflation, without the need to hike taxes, according to the ESRI.

The comments come as the Government prepares to publish next week the latest exchequer returns, which will provide more light on how consumers and businesses are coping with the acceleration in prices and costs.

In recent weeks, the Government announced a new round of measures including a cut in the Vat rate to 9% for gas and electricity. It has insisted that it will not look again at measures to mitigate inflation until the budget in October.

However, ESRI economics professor Kieran McQuinn said the healthy state of the public finances would provide the financial room should the Government face more pressure to help vulnerable households.

Citing the potential for the Department of Finance to post a small budget surplus this year, Prof McQuinn said there were resources to deal with any fallout from inflation to protect households most affected by the price hikes, without adding to the inflation pressures.

Kieran McQuinn, economics professor at the ESRI. File picture

The ESRI forecast last month that consumer price inflation would peak at over 8% in the early summer months, post an average rate of 6.7% for the year, and then fall back somewhat. It is sticking to those forecasts.

Prof McQuinn said: “It is still very difficult to see how these pressures will ease or abate, certainly for the remainder of this year,” with war in Ukraine and as inflation spreads beyond energy products.

There was some good news yesterday on global crude oil and wholesale gas energy costs. Brent oil prices slid by almost 6% to around $100.50 a barrel amid concerns about the global demand amid the tough Covid lockdowns in Shanghai and other Chinese cities. The price of European wholesale gas for delivery this summer fell by around 2% to €93 per megawatt-hour. However, gas trades at many multiples of its price of a year ago.

Meanwhile, Germany plans to increase new debt by €39.2bn this year to cushion Europe’s biggest economy against the fallout from Russia’s invasion of Ukraine, government sources has said, Reuters has reported. The envisaged new borrowing will take Germany’s net debt in 2022 to almost €139bn.

Chancellor Olaf Scholz’s government is expected to approve the debt-financed supplementary budget tomorrow. Germany temporarily suspended constitutional limits on new debt to finance unprecedented fiscal support for the economy during the pandemic, borrowing €130bn in 2020 and a record €215bn last year.

Exploding energy costs exacerbated by the Ukraine crisis gave Christian Lindner the finance minister, no choice but to extend the debt-financed spending spree.

In addition to the supplementary budget, Germany has plans for €100bn in credit authorisations for a special fund for the military.

The new debt will fund tax relief for households and public transport commuters, as well as fossil fuel subsidies for motorists totalling €14bn-€16bn, sources said. Some €5bn will go towards helping companies grappling with high energy prices.

• Additional reporting Reuters