The Minister for Finance has raised concerns over the rising cost of borrowing in advance of the budget and amid ongoing pressure on the Government to intervene again on the cost of living.
Paschal Donohoe on Friday told an Economic and Social Research Institute conference organised in advance of the budget: “Let me emphasise that the days of cheap funding are going.”
Against this backdrop, Mr Donohoe said he would be targeting “the lowest level of borrowing needed” in the forthcoming budget “to respond back to the different developments and strains within our society and economy”, and aiming for further reductions in the debt-income ratio to build resilience should further economic shocks materialise.
The State has enjoyed years of cheap borrowing as central banks kept rates low.
However, with the European Central Bank approving a 0.25 per cent increase in interest rates, and flagging more for later in the year, senior Government sources pointed out that bond yields on 10-year Irish Government debt went above 2 per cent on Friday, compared with almost zero at the start of the year.
And while he said the Government would “continue to play its role in the time ahead” in assisting households meeting cost of living challenges, he warned that the Government’s balance sheet “cannot be used to absorb all of that change that is under way”.
He said there were clear signals that an “economic regime change” is under way in the global economy, driven by post-pandemic disruption, changing monetary policy and the fallout from the war in Ukraine. He said that the Department of Finance’s “best assessment” is that risks flagged earlier this year are “indeed developing”, with changes to the structure of globalisation under way.
Tensions
It comes amid ongoing tensions within the Coalition over whether the Government should proceed with another package of economic supports. While not explicitly ruling out more interventions this side of the budget, Mr Donohoe said there were “limits” to what the Government could do.
“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.”
Senior figures in the Coalition on Friday signalled an openness to another package – while accepting it would do little to address the underlying causes of inflation and insisting no discussions on more interventions are under way.
One senior Minister said more one-off measures such as welfare payments or energy discounts would be considered, but cautioned that the Government needed “to stop chasing every set of price increases” as it was not sustainable, and should instead focus on reforms to bring down prices and keep them down.
A second Minister said if things “get worse, there may be a need for a further intervention” – but that “a big one in October” was also on the cards. Another Cabinet Minister said their view was the budget was the correct time to move, adding: “You can’t keep chasing inflation. It has to be a more measured and planned approach.”
Mr Donohoe also emphasised the importance of weaning the exchequer off windfall corporation tax gains, saying changes to the overseas investment market may lead to some companies moving their operations closer to home.
