The Government aims to draft next year’s Budget so that it doesn't further stoke the kind of price pressures that have already pushed inflation to a 40-year high, Finance Minister Paschal Donohoe says.
Mr Donohoe warned a conference on Friday that the Budget cannot “absorb all of the price shock” facing households as it might risk further fuelling inflation and racking up more debt at a time when borrowing rates are beginning to rise.
“The days of cheap funding are going,” Mr Donohoe told the Economic and Social Research Institute’s (ESRI’s) annual Budget conference.
“We will be targeting the lowest level of borrowing that is needed to respond back to the different developments and strains taking place in society and Government,” he said.
“We will, of course, continue to recognise and continue to help with the cost of living challenge, but overall we do have to prepare and then deliver a Budget that does not of itself add to the inflationary pressures that are now clearly underway.
“Budgetary policy itself must not become part of the problem.”
He said the Government will aim for “a further reduction in the debt-to-income ratio” next year while trying to wean itself off a reliance on corporation taxes.
He called for “perspective” on spending, given the economy is no longer in pandemic mode.
The European Central Bank said this week that it would begin hiking interest rates by 25 basis points in July, with a larger increase possible in September.
Government debt stands at 96.5pc of national income, lower than the eurozone average, but the Government is targeting a ratio of around 80pc by 2025.
Meanwhile, inflation hit a 38-year high of 7.8pc in May, or 8.2pc according to the EU’s harmonised measure.
Mr Donohoe warned that higher inflation was likely to continue, although not “at the rates we are seeing”.
“There are clear signals that an economic regime change is now happening.”
The Government is currently laying the groundwork for the Budget, with the summer economic statement due to be published “in the coming weeks”, Mr Donohoe said.
In a study published at the conference, the ESRI made the case for linking Jobseeker’s Allowance to claimants’ previous earnings, although it warned it would come at a cost and could weaken the incentive to work.