Minister fears fiscal boost will add more fuel to the inflation fire

Despite a spectacular post-Covid recovery in the public finances, he has been consistently focused this year on cutting the deficit and paying down debt.

That means potentially disappointing everyone who is looking for more money to cope with the highest inflation in four decades, from public-sector workers to low-income households.

And now the ESRI has echoed the Government’s caution on public-sector pay, tax cuts and cost-of-living relief, saying in its latest economic quarterly report that helping people make ends meet could make inflation worse.

But is it realistic for the Government to resist calls for help when there is full employment, strong economic growth and a burgeoning budget surplus?

After all, there is money to be spent.

The ESRI is forecasting a general Government balance €1.6 billion to the good by the end of the year, along with unspent money from the €3.5bn contingency fund.

The Government has already pledged about 1pc of national income on inflation relief such as the fuel excise cut and last year’s minor adjustment to tax bands, but it’s far less than some of our European peers.

Meanwhile, the domestic economy is on track to grow by 4.4pc this year – more subdued than earlier forecasts, but still a strong outturn. There is a solid foundation.

The most recent exchequer returns show the tax take is so robust that the Government has reached its objective of a balanced account more than half a year ahead of schedule, thanks to a vibrant multinational sector, booming Vat receipts from consumer spending and increasing income tax from the jobs recovery.

But are we still on solid ground, or are our legs spinning furiously over a deep desert gulch?

The mood emanating from the ESRI is cautious, with warnings about deteriorating global economic conditions as central banks increase rates to fight inflation.

There are downward revisions everywhere from Ukraine to the USA as Putin’s war plays havoc with energy prices and food supply.

With all those risks gathering on the horizon, the Government is obliged not to make things worse.

How would giving people more money make things worse, though?

The fear is that further fiscal stimulus will pour fuel on the inflation fire when the European Central Bank is trying to douse the flames with modest increases in interest rates.

By helping households spend more freely, the thinking goes, tax cuts or rebates support further price increases, leading to a vicious cycle of inflation.

This is why Department of Finance and ESRI economists alike want any fiscal response to inflation to be temporary and targeted.

Yet no Government can stand over making people poorer when it is in their gift to support them financially.

As the ESRI has pointed out, inflation in Ireland is outpacing real income growth. That means that even as people are getting richer in income terms, they are feeling worse off in real terms as price rises eat up their wage gains.

That vicious cycle may turn out to be politically unsustainable, especially once the savings cushion built up during the pandemic is run down and households are no longer trotting along a dusty road, but twisting in the wind as they plunge over the cliff edge.