‘We’ll be poorer for longer’ if inflation gets embedded in economy, Donohoe warns

“We’ll be poorer for longer” if inflation becomes embedded in the Irish economy, Minister for Finance Paschal Donohoe has warned. Budget 2023 must therefore strike a balance between helping those most impacted by the current price squeeze while avoiding adding to existing inflationary pressures, he said.

In an interview with The Irish Times, Mr Donohoe also appeared to rule out the idea of an energy price cap similar to the one announced in the UK yesterday, suggesting it posed too big a financial risk for the State and bore a “striking resemblance” to the infamous bank guarantee of 2008.

“We have to find a way of helping households and businesses buy enough, to help them deal with the more severe consequences of inflation, but at the same time we have to try to avoid doing things that embed global inflationary pressures firmly into the Irish economy,” he said.

The Government is expected to unveil a core budgetary package of €6.7 billion next Tuesday with an additional €3 billion set aside for one-off measures aimed at relieving the current cost-of-living squeeze.

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To manage the risk of fuelling further inflation, the Government was endeavouring to stay inside its core spending framework while limiting the inflationary impact of one-off measures, which are likely to include a double Christmas bonus-style payment for welfare recipients. He said his department was modelling the inflationary impact of various budgetary strategies.

Getting the balance right between “what’s targeted and what’s broad” was a key challenge, he said, while noting that the impact of higher inflation was not just on low-income households but on middle-income ones “who earn too much for targeted social welfare supports but are not earning enough to be cushioned from the impact of rising prices”.

Budget 2023: What to expect

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Mr Donohoe said he would have significant concerns about an energy price cap given it is next to impossible to forecast what the cost would be while it would also send the wrong signal in terms of cutting back on energy consumption. Budget 2023 is expected to contain a series of energy credits totalling up to €600 per household.

The Government, he said, could not spend to the same extent as it did during the pandemic as the inflationary environment is different and the cost of borrowing significantly higher. “If the benchmark for an economic response [to a shock] is always going to be Covid, we’ll quickly create an economic shock of our own in dealing with this,” he warned.

With excess corporation tax receipts being used to fund much of the Government’s budgetary package, Mr Donohoe said he was acutely aware of the concentrated nature of the business tax base but declined to say whether some of windfall would be placed in the rainy-day fund.

With talk of a new 30 per cent rate of income tax on the wane, Mr Donohoe is expected to widen income tax bands to ease the burden on middle-income earners. He acknowledged that by international standards workers here end up paying the higher 40 per cent rate at relatively low rates of income — on anything above €36,800 for a single person — and that this was “a key point of difference” between Ireland and other countries.

Another aspect of the budget the Government is busy working on, he said, was a support scheme for businesses affected by the current price surge. However, he dismissed the notion that the Covid Restrictions Support Scheme provided a blueprint as qualification for the scheme was based on turnover, which was not appropriate in an inflationary shock scenario.

Fine Gael is holding a special one-day conference to gauge the views of small business and enterprise at Thomond Park in Limerick on Saturday at which Mr Donohoe and Tánaiste Leo Varadkar will be speaking.

On the Eurogroup controversy, Mr Donohoe dismissed suggestions that the wrangle had damaged relations between Fine Gael and Fianna Fáil. The Coalition’s rotating-taoiseach plan, which will see one party run the Department of Finance while the other holds the office of taoiseach, has raised questions over Mr Donohoe’s future role as president of the influential Eurogroup if he ceases to be Minister for Finance at the end of the year.