The Government is facing its first major row ahead of the Budget over the extent of social welfare increases to meet the cost of living, the Sunday Independent can reveal.
Fine Gael wants to link welfare transfers, such as the state pension, to average earnings rather than the rate of inflation to control the cost.
But Fianna Fáil’s former social protection spokesman, Willie O’Dea, yesterday said such an approach was “not honest or credible”.
This is the first salvo is what is expected to be an intense clash this summer between Fine Gael and Fianna Fáil over intended measures to tackle the spiralling cost of living.
Fianna Fáil is also alert to recent comments by Fine Gael leader Leo Varadkar in which he spoke of the need to cut taxes, slash college fees and increase childcare payments for the benefit of the so-called “squeezed middle” or, as the Tánaiste also repeated: “People who get up early in the morning.”
Minister of State in the Department of Finance, Fianna Fáil’s Sean Fleming, has said the next Budget will prioritise social spending as distinct to tax cuts.
Mr Fleming said: “Good public services for all the public, health, education, disability, housing, this is our area — quality of life for everyone.”
The Central Statistics Office last week reported inflation was running at almost 8pc, its highest in 40 years.
Two years ago, former social protection minister Regina Doherty, of Fine Gael, announced the intention to link social welfare transfers to the consumer price index.
At the current inflation rate, pensioners could expect to receive a weekly €25 increase in the state pension, at an overall cost of around €2bn.
Yesterday, however, senior Fine Gael sources said such an increase was not affordable and linking welfare to inflation was no longer Fine Gael’s position.
“We have always been in favour of indexation to the cost of living in principle,” a senior party source said. “A government should protect its citizens from inflation — if it can afford to do so,” .
He added that the indexation of social welfare payments to inflation was not included in the Programme for Government.
Sources pointed to a speech made by Mr Varadkar when he was social protection minister in 2016.
In that speech in Donegal, Mr Varadkar said weekly social welfare payments should be linked to either the cost of living or to “average earnings”.
Yesterday, Mr O’Dea said linking social welfare payments to inflation “was grand for Fine Gael” when inflation was running at 1pc.
While he said he understood open-ended commitments could not be given in the current economic climate, now that inflation is at 8pc, “Fine Gael are all of a sudden converted to linking welfare increases to average pay levels”.
Formal talks on a new public sector pay deal will begin this week, with unions seeking increases in the region of 8-10pc.
Increases of that order would also cost in excess of €2bn and would have to be matched by social welfare increases at the same level.
Meanwhile, Finance Minister Paschal Donohoe is resisting fierce pressure from cabinet colleagues to introduce immediate further measures to ease the spiralling cost of living.
Mr Donohoe has argued with colleagues in recent weeks that he can go no further this year than the €1.4bn of measures already announced before October.
He has impressed on colleagues the need to “hold the line” until Budget day.
The Government is coming under mounting pressure to introduce further measures in the coming weeks and months as households struggle with rising inflation.
But Mr Donohoe has made the case that VAT on gas and electricity cannot be reduced any further and the cuts to excise duty of 20c on petrol and 15c on diesel are multiples of what has been done in the UK where excise was cut by 5p.
He has also made clear to colleagues that rising borrowing costs — which saw the yields on benchmark 10-year Irish government bonds hit an eight year high of 2pc on Friday — and inflation will have a profound impact on the Government’s ability to manoeuvre in the Budget.
“As we move into the second half of the year, we’re going to see cost of borrowing go up. That’s going to have a profound effect on the Budget,” a senior source said.
A second senior government source said Mr Donohoe was engaging in “necessary expectation management” at a time when there is mounting pressure on the Coalition to do more to fight inflation.
“Government should focus on reducing costs for people — childcare, healthcare, transport, college, income tax,” they said. “Stuff that actually will reduce inflation.”
A third senior source said: “We need to manage inflation, not set it on fire.”
Sources across Government said further measures were not imminent and there are no discussions on a package of measures to address the cost of living that could be announced over the summer.