The old joke about someone asked for directions in the middle of the Irish countryside ends with the punchline: “If I was you, I wouldn’t start from here.”
Something similar applies to the Government's efforts to combat rising inflation – Ireland is already an expensive country.
The latest Eurostat data, for 2020, show a basket of 2,000 consumer goods and services cost 40 per cent more in Ireland than the EU average, or about 30 per cent more than the other euro zone countries.
Incomes here are high too, of course, though other data showing we are second best-off in the EU after tiny Luxembourg are misleading – they are completely distorted by multinational activity here.
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As former Central Bank governor Patrick Honohan put it: "Ireland is a prosperous country, but not as prosperous as is often thought." He reckons we are between eighth and 12th of the 27 EU countries in terms of real income levels.
So we are a highish-income country with very high prices.And the consequences of this are now a central issue in politics as a bout of inflation has hit and suddenly made life harder for many households. When you start from a point that the finances of many people are already stretched, any extra pressure quickly sets alarms flashing.
There are now real questions about what the Government can – and should – do about this. The political debate is now all about how what has been done is not enough to close the gap for households. But the idea that the State can just step in and compensate most of us for higher prices is ludicrous. Its immediate job is to protect the vulnerable and less well-off, not put enough money in all our bank accounts to compensate for higher prices.
‘Rip-off Ireland’
The high prices level here has played slowly into Irish politics over the years as costs here have gradually risen above EU averages . There has been the “rip-off Ireland” controversies of the Celtic Tiger years, the flare-ups over insurance and legal costs, the rows over the cost of mortgage borrowing and so on. Policies have tried to address this and there have been some wins. But it takes forever and entrenched lobbies, like the legal profession, fight every inch of the way.
And now that prices are rising ahead of incomes, some groups are getting really squeezed. The welfare system helps, of course, but the ratcheting-up of prices now has pushed many lower-income households into real difficulty. As well as those reliant on supports, this includes many working people on low pay.
Also, the squeezed middle may be more squeezed here than elsewhere. For example, a family renting in an urban area and paying childcare will not have much left for luxuries unless they have two relatively high-earners. In many other countries, the two big bills – rent and childcare – would be significantly lower. Here are two areas where Government policy needs to make a difference.
This is the backdrop to the political heat over the recent rise in inflation and the scramble to do “something”. In its – generally excellent – economic response to the pandemic, the Government aimed to introduce supports which were temporary and targeted. This time it stuck to the temporary idea and there are some very welcome measures aimed at lower-income households. They will help. But the main measure – the €200 rebate – is not targeted. It is being paid to everyone. This is an effort to address some help to the squeezed middle-earners. But the significant cost would have been better directed at more targeted measures – what about a spring welfare bonus on the lines of the Christmas bonus?
Foolhardy pretence
Pretending that the State can protect us all from higher prices is a dangerous fallacy. The exchequer finances can afford the €550 million bill – there is leeway left after a big overrun in taxes last year. But it is foolhardy to pretend that, when each and every economic problem hits, the State can afford to step in and take away the pain for everyone.
Higher energy prices mean Ireland is a little less well-off, at the expense of energy-producing counties – the Government can’t simply chase this trend by writing cheques to everyone.
It does need to protect lower-income households, and especially the very lowest. Income redistribution and protecting the weakest is one of the key economic and social roles of the State. But giving €200 to better-off households which have accumulated some €15 billion in extra savings during the pandemic, on the other hand, is not. It makes no sense to be subsidising people whose savings accounts are already overflowing at the expense of the general taxpayer.
Inflation may ease as the year goes on, but we just don’t know. Labour shortages will push up Irish wages – with housing costs also rising, this threatens a loss of competitiveness if short-term inflation is higher here than elsewhere. And energy prices may remain high in the medium term, as the transition to green energy keeps fossil fuel costs on the rise.
So political pressure will remain.There will be talk of pushing up public sector pay and the minimum wage and of budget welfare rises and tax measures. But while the State can and must ease the bumps for those most exposed to higher energy prices now – and for the energy transition to come – it can’t take away the pain of higher prices across the board.
Irish politics now seems to consist of the Government going so far in spending money to address a problem and the Opposition calling for more. Meanwhile the interest rate cycle has turned . The pandemic era of “free” money is over. As of yet, few in Leinster House seem to have noticed.