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Shadows cast by seemingly sunny economic outlook



Stock image

Stock image

Stock image

As the sun high in the sky still casts shadows on the ground, so too the sunny economic outlook cannot hide the darkness. From the outside, the economic fortunes of the country have had quite the turnaround. After the two years lost to Covid-19 and the necessity to go deeper into debt to cope with the unprecedented emergency of the pandemic, the economy has bounced back strongly when examined through indicators such as growth, exchequer revenue and numbers at work.

However, the haze of positivity disguises the gloom behind.

The cost of living, energy prices and inflation are having enormous impacts on what one might describe as the ‘real’ economy – the spending power of the money in a consumer’s pocket. 

Now the State’s leading economic think-tank is warning of more to come. Household bills could rise by as much as €2,000 a year and over €3,500 when the cost of filling your car is included, according to the Economic and Social Research Institute (ESRI). 

This inflation is plunging record numbers of households into energy poverty. Energy poverty is where more than 10pc of a person or household’s net income is spent on energy bills. This measure has already hit a record high of 29pc – above the previous high of 23pc in the mid-1990s.

The ESRI has a suggestion for the Government to alleviate the pressure on low-income households: a Christmas bonus-style double welfare payment to offset rising energy bills.

It is quite negative on the previously-employed government measures of giving payments to all and cutting Vat. The authors point out the politically unpalatable lesson that, if the objective is to protect those most affected by rising energy prices, cutting indirect taxes is a poorly targeted response. In that case, most of the revenue is spent compensating high-income households who have been least affected. Besides, the ESRI says that cutting taxes on energy weakens the incentive to invest in energy-saving technology and behaviour. The coalition has identified this as a key priority to meet its climate action targets of more than halving greenhouse gas emissions by 2030.

Offsetting the costs for everyone may be a political imperative for parties seeking re-election, but is contradictory to their own climate policies. 

Covid-19 saw a reduction in the consumption of energy, but the world is taking time to readjust. Inflation is being driven by energy costs, with pandemic-related supply chains issues partly to blame, and the war in Ukraine also contributing. 

There are also clouds hovering on the horizon to take into account. The Central Bank says price pressures have increased the risk of more medium-term inflation. Aside from day-to-day spending and energy bills, the inflationary pressures present new challenges for borrowers.

The effects of the pandemic have eased, but the range of medium-term risks have grown. Thankfully, the Central Bank is saying there is only a slight risk of a recession. A relatively sunny forecast so – with the risk of rain.

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