ON THE FACE of it, Budget 2023 was a giveaway of epic proportions. There was something for everyone. Tax cuts, welfare increases, childcare subsidies, reduced student fees, an end to hospital charges and energy cost supports for businesses and households.
These were just some of the plethora of attention-grabbing measures announced.
But, what the government appears to have given with one hand, rising prices will more than take away with the other.
According to the government’s own economic projections, consumer prices will have increased by 16% between the beginning of 2022 and the end of 2023. Budget measures will help cushion that blow to purchasing power, but for too many people on the margins, it won’t be enough. Everyone will feel the pinch, and more people will be pushed into poverty.
As an example, the basic pension increased by €5 in 2022 and is set to increase by a further €12 in 2023. This is less than half the cumulative €40 it would have had to increase over that time just to keep pace with expected inflation.
In the short term, pensioners will benefit from two double payments in the run-up to Christmas. Those eligible will receive one extra €200 living alone allowance and one extra €400 fuel allowance payment.
Then what? Inflation will slow eventually, but consumer prices are highly unlikely to fall. If the same ‘once off’ trick isn’t repeated every year, a permanent loss of living standards will be locked in unless future welfare increases are even higher than inflation. Sticking plaster solutions are being used to treat a chronic problem.
Public finances in excellent shape and set to keep improving
Even after allocating an extra €4.1bn in once-off cost-of-living measures, the government expects to record a €1bn surplus for 2022, one of the few European countries expected to do so.
The surplus for 2023 is expected to be six times (or 1.8% of national income) larger, even after allocating €2bn towards a ‘Ukraine contingency’. At this rate, the surplus will be so large by 2024 that we would still be in the black even if €10bn of ‘windfall corporation tax’ receipts were not to materialise. There is certainly a lot being ‘left in the tank’!
Because the government will be taking even more money out of the economy than it is putting in, fiscal policy will be contractionary and deflationary at a time when interest rates are rising and the economy is slowing.
Having seen the big thumbs down financial markets gave to last week’s so-called mini-budget in the UK, yesterday’s budget will have been framed with one eye to likely investor reaction. They will not be disappointed that Ireland is set to keep topping European fiscal league tables.
Some measures will add to inflation, but overall this is a deflationary budget
While the overall, macroeconomic budget impact will be deflationary, and the temporary fuel excise and VAT reductions on energy have been extended, some measures will feed through directly to prices.
The ‘auld reliable’ 50 cents added to the price of a packet of cigarettes will add to inflation but, to be fair, tobacco is still likely to trail average consumer price increases. VAT on hospitality will revert to 13% in February, as planned, but VAT on newspapers is to be axed.
Meanwhile, the introduction of a 10% levy on concrete, ostensibly to offset some of the cost of the Mica redress scheme, is likely to further fuel construction cost inflation. The carbon tax increase of €7.50 per ton will go ahead, although this will be a wash in terms of prices at the pump since it is to be offset by ending the 2c a litre National Oil Reserves Agency (NORA) levy.
More generous energy cost supports for businesses than for households
The government is taking a very different approach in terms of easing the pain of surging energy costs for households than for businesses. Some 2 million households will share €1.2bn by way of three flat €200 electricity credits, no matter how high energy prices climb.
Meanwhile, 400,000 businesses are expected to share a further €1.2bn set aside to finance the new Temporary Business Energy Support Scheme. For a period of six months, and up to a ceiling of €10,000 per month per business, they will be compensated to the tune of 40% of the annual increase in their energy costs where that increase has been by more than half.
This is not quite a price cap, but the higher energy costs go the larger will be the subsidy to businesses. Some of the details are still to be ironed out, but even relatively large businesses that were spending €50,000 a month on energy last Winter appear eligible for the full 40% subsidy.
This is to be paid for by a windfall tax on energy companies. By contrast, the French government announced this week that their new windfall tax will be used to cap energy price increases for both households and small businesses at 15% for 2023, having been capped at 4% in 2022. Differential treatment of firms and families is a political choice.
Something for everyone, not enough for those who need it most
US President Joe Biden famously said: “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” That is to say, talk is cheap, but how you budget is a concrete demonstration of your political values.
Budget 2023 put a premium on supersizing the budget surplus just as inflation bites and the economy slows.
Income tax cuts were skewed towards the top half of the income distribution. Energy subsidies are far more generous for businesses than for households.
Winter is coming, and we are still set for the steepest fall in living standards since the dark days of 2009.
Victor Duggan is an economist.
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