Cliff Taylor: The economic picture could get very messy – and fast

Economic debate wasn’t put on hold during Covid-19, but it took a back seat. There was broad support for the measures the Government took to support households and businesses. The housing crisis bubbled on. But facing into the economic consequences of the invasion of Ukraine, we are about to see the kind of divisiveness and bickering not seen since the financial crisis and its aftermath.

All the conditions are in place. On any calculation the budget numbers later this year and heading into next year are going to get tighter. The European Central Bank is not going to help countries pay for the war in the way it helped them pay for Covid – Ireland’s 10-year borrowing rate is already rising steadily.

Spending and tax choices will have to be faced head-on, not fudged or delayed. During Covid -19 – correctly – support for households and businesses was significant and widespread. But now Ministers warn that the State can’t step in again and cushion everyone from the economic impact of the war. And with a significant risk now that the war will drag on, the rows over who gets what support are going to build. And build.

There isn't a "right" answer to what should be done. Energy prices shooting higher leaves Ireland worse off. Most of us will face a hit to our spending power – those who can't cope with it financially are the ones who should get State help.

Unpredictable energy crisis hangs over the economic outlook

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War in Ukraine exacerbates Irish economic problems lurking in the background

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Cliff Taylor: Why is the State giving €200 to people with bulging bank accounts?

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Cliff Taylor: Ireland needs to think about Ukrainians being here long term

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The conflict could go on for months – maybe even years . But even when it ends, things will not go back to the way they were

Yet political pressure means the Government is having to do a delicate dance around the issues. In the case of the carbon tax, the planned increases in May on home heating will be only a fraction of that caused by the market. The sensible thing is to go ahead and find other ways to compensate those hit hardest. Now we are in a netherworld of promises that the carbon tax rise will go ahead, but will be “offset”.

The difficulty in constructing policy is caused by not knowing how long this will terrible war might last. Nato chief Jens Stoltenberg has warned that the conflict could go on for months – maybe even years . But even when it ends, things will not go back to the way they were – Ireland needs to plan for the likelihood of permanently higher energy prices and the possibility of a serious hit to growth internationally in the months ahead if supplies from Russia are disrupted.

Diesel shortages

The actual exposure of Ireland to fuel shortages depends on how events play out. Russia is a big oil exporter and experts say an EU ban on Russian oil – now under discussion – could lead to international shortages in areas such as diesel. Ireland, like all other EU countries, has some reserves, but could be exposed. Either way, whether there are supply problems or not, the more supply is constrained internationally , the worse the hit will be from higher prices.

Some things just don't add up any more, especially with wages rising too

In terms of gas supply, Ireland is not directly exposed to Russia and instead relies on the UK, from where nearly three-quarters of our gas is piped, having originated in the UK itself and Norway. Redirecting gas supplies from Norway to other EU countries most exposed to Russian gas – as would seem to be required by existing agreements to even out the economic hit – is not technically straightforward. The Government is confident Irish gas supplies are secure in the short term, though if there is a long-term supply squeeze, supply concerns could rise heading into next winter. And in the meantime gas prices – like oil – look set to remain high.

High energy prices are leading businesses to reconsider some product lines and investment plans. Some things just don’t add up any more, especially with wages rising too. Businesses are looking for a dig-out from Government, too, with many facing the cumulative impact of Covid-19 and the war. Wage talks with the public sector unions are being reopened. The Opposition, meanwhile, is pushing for more to be done more quickly, often with scant regard to the longer-term pressures now building on the exchequer. This could all get very messy, very quickly.

Pension age

Other decisions, some put on hold during Covid and some delayed because politicians like postponing the tricker ones, are queueing up to be made. The Government has a big call to make on the State pension age, when the Pensions Commission has called for a gradual and slow increase over a number of years. Sinn Féin demands the age be brought back to 65, with strong support from the trade unions and other Opposition parties.

The decision is framed purely around fairness to those retiring. The trade-offs are generally ignored, particularly the need for existing employees to pay more in tax to allow the State to continue to pay pensions to those retiring at 66. Given the economic disadvantages facing younger people, making them pay more tax to support an early retirement age is surely the wrong choice.

As a country with significant economic strength and resilience, Ireland can find a way through all this

We could speculate that the game plan of Minister for Finance Paschal Donohoe was to use the report of the commission on tax and welfare, due over the summer, to open up the debate about how to pay for a bigger State, wider entitlements and the big issues of an ageing population and climate change.

He might have hoped this would be framed by a bounceback from Covid-19, a big improvement in the public finances and some calmer times. Instead the economic debate is going to be an ongoing catfight, with the likelihood of little regard to the trade-offs that Ireland faces.

As a country with significant economic strength and resilience, Ireland can find a way through all this. But major challenges of decision-making and implementation lie ahead – all against a backdrop of a really difficult debate and a squeeze on resources that will raise temperatures back to the level of the water charges row. And beyond.