Anticipated €2bn package to tackle costs likely to increase, says expert

Germany recently announced a €65bn package to help tackle soaring costs despite reports that the country is on the brink of a recession.

The estimated €2bn package of once-off measure to combat the cost-of-living crisis expected in the upcoming budget is likely to "go up", a leading economist has said.

Chris Johns, former chief economist with Bank of Ireland, said that this year’s budget is “about survival” and suggested the government need to spend rather than save in certain areas. 

“The threats are huge. I don’t think now is time to be putting money aside for a rainy day fund,” he said during pre-budget discussion with professional services firm PwC.

The €2bn package is in line with what other economic commentators, such as Austin Hughes, have said is needed to help people through this energy crisis. However, the sum is much smaller than what others on the continent are delivering.

Germany recently announced a €65bn package to help tackle soaring costs despite reports that the country is on the brink of a recession. Meanwhile, Liz Truss, the UK’s newly appointed Prime Minister, has announced a £100bn (€115bn) package to tackle energy costs.

Corporation tax

Mr Johns also said that Ireland’s corporation tax windfall should be used in the budget to help cushion businesses and consumers currently battling soaring costs. This suggestion goes against what Ireland’s budgetary watchdog recently recommended in it’s pre-budget submission.

The Irish Fiscal Advisory Council, or Ifac, urged government to create a new national pension reserve fund to save excess corporation tax receipts. Ifac said by doing this the State will gradually reduce its over-reliance on these “risky revenues”.

The watchdog said it is likely that corporation tax receipts will overtake Vat as the second largest source of tax revenue this year. In the last 12 months, corporation tax receipts reached over €20bn and, in 2021, 53% of net receipts came from 10 companies.

However, Mr Johns is not worried. He said that “there is no sign that these companies are going elsewhere” to escape the economic headwinds. 

Mr Johns said that the government is now “drowning in cash” due to Ireland’s healthy Exchequer returns and GDP growth which can be used to help energy customers. However, he added that corporation tax did need to be put aside into a rainy day fund “a long time ago”.

Buoyant economy

Ireland’s economy is buoyant post-Covid-19. GDP rose 11% on an annual basis, while GNP, a measure of economic activity that excludes the profits of multinationals, increased just over 2%. This growth has created a buffer for current economic risks, however, recession looms worldwide.

“There’s a global recession on the way, the extent of which we just don’t know. The downturn, I hope, isn’t going to be too severe,” said Mr Johns.

He added that most threats to Irish businesses are external. For example, the slowdown of trade in China will hurt Irish exporters. 

Ireland is in a better position to tackle current headwinds compared to the UK, said Mr Johns. For example, Ireland's inflation rate declined from 9.6% in July to 8.9% in August while UK inflation stands at around 10% and Goldman Sachs warned it could reach 22% due to energy costs.