RAISING SOCIAL WELFARE rates, even on a temporary basis, is the best way to cushion the most vulnerable from the impact of rampant inflation, campaigners and economists say.

With low-income households “disproportionately affected” by rising prices, economists from the Central Bank of Ireland and the Economic and Social Research Institute (ESRI) believe the Government may need to adjust welfare payments to reflect their revised outlook for inflation.

The Government, which has so far resisted opposition calls for a mini-Budget in response to the economic fallout from Russia’s invasion of Ukraine, is set to unveil a new package of measures this week, aimed at easing the burden of rising prices on households.

The Public Service Obligation levy on energy bills is expected to be scrapped as part of the new ‘cost of living’ package — the second round of measures rolled out in a little over two months.

However, Government sources have said there is a need to “manage expectations” ahead of the announcement, given the uncertainty around the outlook for inflation.

It comes after the Central Bank downgraded its economic forecasts for 2022 against the backdrop of soaring prices.

Irish household earnings are now expected to fall in real terms in 2022 for the first time since 2013 with inflation expected to outpace the rate of income growth.

As a consequence, thousands of low-income, older and rural households — particularly those with no income from wages who are reliant on some form of social welfare — could see a significant decline in their standard of living, economists say.

Irish consumer prices were on average 6.7% higher in March this year than they were in March 2021, according to Central Statistics Office figures released last week.

But with both the Central Bank of Ireland and the Economic and Social Research Institute forecasting prices to rise at an even faster pace over the coming months, lower-income households and people on fixed incomes are expected to face significant challenges.

The Society of St Vincent De Paul (SVP) said its members are already seeing the impact of rising prices on people facing poverty.

“People are cutting back on essential energy use for fear of the next bill, or because there is no money to top up pre-payment meters, and are having to make the impossible choice between buying food or turning the heat on,” a spokesperson for the charity said in a statement.

The latest CPI showed that this situation is “continuing to get worse”, according to the spokesperson. “We have to remember that inflation is actually higher for people on the lowest incomes, who spend more of their budget on essentials like energy, food, housing and transport – all of which are getting more expensive.” 

SVP said raising social welfare rates to meet the cost of living, creating a hardship fund to support people struggling with energy costs and increasing and extending the Fuel Allowance should be part of the Government’s response.

‘Targeted and temporary’

Current social welfare rates were set at Budget time last year when the Department of Finance expected inflation to peak at 4.5% in the fourth quarter of last year.

But the rate at which prices are increasing has accelerated sharply in 2022 against the backdrop of the war in Ukraine.

The invasion and Western sanctions have combined to push up global commodity prices, in particular, crude oil and wholesale natural gas prices.

That, in turn, is pushing up home energy and heating bills, which along with rising petrol, diesel and home heating oil prices, is the main driver of the current bout of inflation.

Food prices are also starting to rise along with fertiliser prices. Commodity markets are also pricing in the potential loss of Ukrainian and Russian grain later this year.

The CSO’s March Consumer Price Index revealed the price of flour and other cereals, up 10% over 12 months, climbed 5.1% in the month of March alone.

Both the Central Bank and the ESRI have recommended that any measures aimed at insulating households from inflation need to be targeted at the most vulnerable so as not to add to inflationary pressures building up within the economy. They would also need to be temporary in nature so as not to add to the long-run cost of running the State.

Asked last week by The Journal whether broad-based increases to core social welfare rates would meet the definition of “targeted”, Mark Cassidy, Director of Economics and Statistics at the Central Bank said they would.

“We know lower-income households are disproportionately affected,” he said.

We also know lower-income households, not only do they spend more of their incomes on fuel and energy than higher income groups, but we also know that they’re more vulnerable to the effects because they don’t have savings. They don’t have the same buffer between the money coming in and the money going out and therefore they are more vulnerable to the effects. 

In that context, Cassidy said policymakers could “look at social welfare rates”. However, he cautioned that any increases may need to be temporary so as not to add “permanently to the cost base of the economy” after the current crisis subsides.

Speaking to The Journal this week, economist Karina Doorley, Senior Research Officer with the ESRI said the rate adjustments announced in Budget 2022 were designed to be inflation-proof. 

“Some payments, like Child Benefit and the Working Family Payment, were not increased in line with inflation expectations,” she said. “But by and large, most of the welfare payments rose in line with expected inflation.

But obviously, that’s changed now. Expected inflation is going to be higher and unless there is a revision of those rates, then it is likely that those households on low incomes or with no wage income will experience greater losses than those who do have a wage and who can go to their employer and bargain for a wage increase. 

The Government “can’t compensate everyone for expected inflation”, Doorley added. 

She said, “The response is going to have to be very, very targeted. But I would argue that an increase in core rates is targeted. These are low-income households. If you want to be even more targeted, you could make the increases temporary.”

Doorley said the increase could take the form of an extra, one-off payment like the Christmas bonus for people in receipt of long-term welfare payments like the State Pension, the One-Parent Family Payment or the Long-term Jobseeker’s Allowance.

“There could be an extra bonus this year or something like that,” she said, “something that is targeted and temporary to allay any fears that the exchequer is going to have to come up with this money every year in future because realistically, it will be expensive.”

Asked whether increasing social welfare rates across the board could actually increase inflationary pressures within the economy, Doorley said it’s possible. But the impact is likely to be very mild.

“Of course when you give people extra money it can increase demand for goods and services,” she said.

“But I would argue that if that money is targeted at low-income households, the effects are going to be moderate.”

She added, “The cost of living package that was announced recently, some of that was targeted but some of it was very broad and is going to be inflationary. Any more measures that are going to be introduced, they should be very, very targeted.

“The easiest way to do that is through the social welfare system.”

— Additional reporting by Christina Finn