Donohoe warns there are limits to what the State can do in the face of cost of living crisis

Minister says the focus is on what can be done at budget time

There are “limits” to what the Government can do in the face of the cost of living crisis, Minister for Finance Paschal Donohoe has said.

Mr Donohoe, who addressed an ESRI conference on budgetary perspectives on Friday morning, warning that there were “clear signs that an economic regime-change is now happening”. He said afterwards that his focus was on what could be done at budget time rather than anything sooner.

While he did not explicitly address whether there would be further interventions, speaking afterwards he said: “Where my focus is, and the focus of the Government now is, what help we can give at budget time.”

“There are limits to what Government can do, there are constraints that we have to be aware of, and the taxes that so many are calling on me to cut further now – particularly in the Opposition – are also the same taxes that we need to pay for the public services that we have to be certain we can maintain at a time in which we are still facing challenges.”

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During his speech he said the war in Ukraine was the third “in a set of quick-fire shocks to hit our economy in recent years” following Brexit and the pandemic. He said that “the sequencing of these shocks and their proximity to each other does suggest that we are living in a more shock-prone and hence uncertain world”, where risks that were previously unlikely “appear to be increasingly coming to pass”.

The war is causing “supply-side shocks” in the form of input and raw material shortages, as well as the risk of food shortages across the world, and hikes in energy and commodity prices. The main impact in Ireland is higher prices and record inflation, he told the conference, outlining his belief that “the economic issues we are discussing today will persist beyond the short-term”.

There is likely to be at least some “reconfiguration of the global economy” in the years ahead, with changes to the nature of globalisation driven by geopolitical changes. This could have knock-on effects on the offshoring model of many multinational companies, he added, which Ireland had been a net beneficiary of in recent decades.

“Any change, any fragmentation of the global economy along geopolitical fault lines, would have an impact on the nature of globalisation as we currently understand it. Ireland, of course, has benefitted from many of these changes.”

The Department of Finance assessed risks to growth earlier this year, Mr Donohoe said, and “our best assessment at this point is that many of these risks are indeed developing” – citing inflation, weakening external demand, and tightening financial conditions.

He said some analyses suggested that many of the structural factors that have “kept a lid on inflation” are now changing and “may even be moving into reverse”. While he cautioned that he did not expect current inflation rates to persist, they would likely be higher than the rates of recent years. “There are clear signals that an economic regime-change is now happening.”

During his speech he said that the Government’s balance sheet “cannot be used to absorb all of that change that is under way”, but that the Coalition would “continue to play its role in the time ahead”.

He said measures the Government has already put in place will cost more than €1 billion this year. “I appreciate the rising cost of energy, the change in the standard of living that many are facing is a real challenge at the moment but we have already put in place a broad set of measures.”

He said sovereign borrowing costs were now on an upward trajectory. “Let me emphasise that the days of cheap funding are going”. The State’s balance sheet showed debt levels were “too high” – albeit having recovered to pre-pandemic levels and hovering “only slightly above the euro area average”.

He signalled that given the change taking place in sovereign debt markets “I will indeed be targeting the lowest level of borrowing that is needed to respond back to the different developments and strains within our society and our economy”, while aiming for a further reduction in the debt-income ratio “to continue to rebuild the kind of resilience that I believe will be needed to help our country and our economy to respond back to the environment I have just described”.

“My focus and the focus of Minister (for Public Expenditure Michael) McGrath is now on preparing the budget and at budget time putting in place the measures that we know will be needed to help many with the rising cost of living.”

Jack Horgan-Jones

Jack Horgan-Jones

Jack Horgan-Jones is a Political Correspondent with The Irish Times