Gerard Brady: There is logic in extending schemes to protect households and businesses

Just over €20m out of the €1.25bn set aside for Tbess has been drawn down despite record energy costs facing businesses. Picture: iStock

The mood music in the global economy is much lighter as we enter spring. Signs point to some easing of inflationary pressures, less volatility in wholesale energy prices, and resilient global economic activity, despite sharp increases in interest rates. We should be more confident about 2023 than we might have expected to be late last year.

For many however, far from improving, the rising cost of their winter energy bills has only really begun to hit home, as letters arrived in the post over recent weeks.

This is difficult timing for Government, given that many of the energy cost supports put in place in 2022 for both households and businesses are due to expire before the end of the month, including the energy credit for households, reduced tax rates on some fuels, and the Temporary Business Energy Support Scheme (Tbess).

The question of whether the State should extend those energy subsidies or not depends on two tests. The first is whether it can afford to extend them. The second is whether it needs to.

Full coffers

We learned in recent weeks that the income tax take for 2022 rose to €31bn, up by over one-third on 2019. Last year the Exchequer ran a significant surplus of over €5bn, with over €6bn of additional funds saved away.

It will run another significant surplus in 2023. For now at least, the coffers are as full as they are ever likely to be.

What is more, some of the schemes which were put in place have yet to be used to capacity. Just over €20m out of the €1.25bn set aside for Tbess has been drawn down, despite record energy costs facing businesses.

Ibec has outlined the issues which have resulted in slow drawdown, such as an inappropriate reference period against which to measure energy cost increases, and limits on companies who pay energy bills through their landlord. 

Schemes which haven’t been effectively utilised should be adjusted to make them less complex, rather than withdrawn.

We know that it won’t be possible for the State to take away all the pain of the energy crisis, but neither should it be afraid to extend payments or tax reductions where they make sense. 

Based on the healthy Exchequer position, there is no doubt that the State can afford further targeted extensions.

Then follows the question of whether the Government needs to extend the cost-of-living measures. Over the winter, gas demand reduced dramatically across Europe in response to higher prices and favourable weather.

Demand in early winter was down over 25% on the average between 2016 and 2021. As a result, gas storage levels across the EU stood at 72% of capacity at the end of January. 

This is relative to normal January storage levels of less than 50%. All this good news has reduced Europe’s vulnerability to gas price fluctuations in the short term.

High prices remain

This is evident progress. But for businesses and households, it is the price level that really matters for affordability. European gas prices remain three times above their normal levels. 

There is also the scope for further volatility as global demand for energy recovers, particularly as the Chinese economy re-opens.

Although inflation is easing in Ireland, price levels are set to remain high for some time. In this context, energy cost supports act like a parachute for those struggling with bills, they won’t stop the fall but they will ease the impact. 

There is logic to extending schemes which best protect households and businesses, like Tbess.

Government interventions shouldn’t remain open-ended and can be better targeted at those who need them most, but some cost-of-living measures will be needed for much of 2023.

•  Gerard Brady is chief economist at Ibec.