Cliff Taylor: Electricity rebate is bad politics and bad policy

At the risk of sounding like the Grinch, what on Earth is the Government thinking of with its €100 electricity rebate for every household?

I know electricity prices have gone up. And there is a good case for supporting those worst hit. But giving €100 to every household is handing a lot of cash to people who simply don’t need it. Household savings have reached a record during the pandemic and the deposit accounts of many households are already flowing over.

It is not surely beyond the expertise of a Government who thought up ways to funnel billions to businesses and individuals as the pandemic hit to think of a better way via a mix of welfare and perhaps tax measures.

It may be impossible to precisely target these kind of initiatives. But that does not justify wasting money by giving it to better-off households, many of which will hardly notice.

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The rebate won't mean much to many Government voters – and won't be enough to win over those now supporting other parties

The Opposition reaction was instructive. Sinn Féin said that the money should be paid as quickly as possible and that people not be left waiting for their €100 until next spring. People Before Profit said they couldn't oppose giving people money, but it should be more. Labour and the Social Democrats at least both argued that the money should be better targeted.

Nobody will vote against giving people free money. No one questioned where the money was coming from. And no one seems to have noticed that the move, which will cost €210 million, comes as there are signs from international central banks that the interest rate cycle has turned.

The days of “free money” for governments are drawing to an end – we can only hope that borrowing costs remain moderate, but they will certainly not be at zero interest rates for much longer. Higher inflation is leading central banks to react in this regard – and this will put the squeeze on exchequers to reduce borrowing.

Limited ability

Higher prices are also troubling voters. But bar protecting the vulnerable there is a limited amount the Government can do, at least in the short term, even if there are long-term challenges and opportunities in marrying affordability with green energy provision.

The latest ESRI report said that Budget 2022 had done a reasonable job in protecting incomes against expected inflation through tax and welfare changes, although some households were exposed, and more would be if inflation takes off. Indeed, there is a debate to be had about how the return of inflation is dealt with in tax and welfare measures in future budgets.

But random payments like the €100 rebate to 2.1 million households are not the way to go. It looks like a messy compromise between Ministers who wanted to “do something” and those who wanted to ensure it was a once-off event.

The Government, with some justification, will defend its pandemic record, but it has – perhaps inevitably – delayed the delivery on other agendas

The Government can afford it. Borrowing this year will likely come in below €10 billion, half the initial forecast. The €210 million will hardly make a blip in next year’s figure. There is plenty of leeway in the budget plans, as things now stand, although the impact of the Omicron variant remains unclear.

But there were other ways to do this. The amount of cash involved would, for example, have been enough to give a once-off two-thirds bonus to all welfare recipients in a week during the spring – in other words, one week where payments were 166 per cent of the normal rate.

In addition to the Christmas bonus – a double payment – this would have gone some way to protecting the less well-off from higher inflation.

But with Sinn Féin's populist-led programme appearing to resonate with voters, the Government seems to be panicking. The decision was made to target "middle Ireland", a mythical constituency composed of many different interests, many now moving away from their traditional political homes in Fine Gael and Fianna Fáil.

Avoiding the issues

But the electricity rebate won’t mean much to many Government voters – and won’t be enough to win over those now supporting other parties.

Like the promise of income tax cuts in the years ahead, most likely to be more than offset by tax rises elsewhere, it is not addressing the issues that have pushed people away from the Coalition parties – the housing crisis, queues in healthcare, and a seeming inability to make real progress on these big issues; to get “stuff” done.

The Government, with some justification, will defend its pandemic record, but it has – perhaps inevitably – delayed the delivery on other agendas.

Addressing the big issues and funding climate transition comes amid the signs that the interest rate cycle has turned. This will, at some stage, change the debate in Ireland, although probably not for a while yet.

The Bank of England has increased interest rates this week and the US Federal Reserve is eyeing three increases next year. Both are running down their massive programme of support for government borrowing and the ECB will do likewise.

Even if an ECB interest rate increase is some way off, the cost to the State of borrowing is set to start to creep gradually higher and investors will again be assessing the financial outlook for different states.

The State ends 2021 with borrowing much lower than expected and likely to fall further next year. We have some leeway. But more careful management of spending may again be in vogue – or become a necessity – before too long. And the Government is, after all, spending our money, raised from taxes – or borrowed and paid for by future taxes.

Spending a chunk of it on giving cash to households which have more than enough of a financial cushion to absorb higher energy prices is a waste, both financially and, surely, politically. It is out of step with a generally appropriate budget policy for next year. The opinion polls are rattling nerves in the Coalition. But this is a poor response.