By: Minister of State with responsibility for Financial Services, Credit Unions and Insurance; Sean Fleming
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Good afternoon everybody,
Firstly, I’d like to thank the Dublin Economic Workshop organising committee for organising this conference and for inviting me to speak here today. This is the 45th Dublin Economic Workshop, and the first in-person DEW conference since 2019. This conference provides an important platform for public policy discussion between organisations and institutions from across the private and public sectors. Open and honest policy discussion such as the kind supported by this conference encourages debate and knowledge exchange, and as a result, better outcomes for society through better policy implementation and design.
I am delighted to be asked to speak here today alongside notable speakers such Dr. Gillian Phelan of the Central Bank of Ireland and Danny Mc Coy of IBEC, and it is an honour to open the first session of the conference on “policy prescriptions for a high inflation economy”. The question of how to best manage the economy in an inflationary context is a key concern for Government and one which is of particular relevance to the Department of Public Expenditure and Reform as we approach Budget 2023 on the 27th of September.
This coming Budget will be formed in an economic climate which is without precedent in recent decades, with many challenges facing us. Inflation has reached its highest level in decades, not just in Ireland but across the European Union, the US and other countries. The pandemic has caused significant supply chain disruption and a glut of demand from pent up savings, both of which have contributed to upward pressure in costs faced by households and businesses. These legacy challenges from the pandemic have been multiplied by the consequences of Russia’s invasion of Ukraine. The war, which first and foremost has led to a devastating humanitarian cost, has also created a substantial economic cost, as the wider geopolitical conflict with Russia has led to sharp increases in energy prices in particular, which in turn are beginning to pass through into food and commodity prices, and the wider economy.
This adds to the cost of living for individuals and increases costs faced by businesses significantly. Prices have continued to rise as economic sanctions implemented by the EU on Russia take effect. In addition, long standing Brexit related risks remain. Taken together, we are currently facing a level of inflation we have not seen in 40 years with Ireland recording an annual inflation rate in July of 9.6 %, with the latest inflation figures for August reporting an inflation rate of 9%.
Comparing Ireland’s inflation to other EU countries, we are ranked 11th of the EU27. This situates us below the EU average for inflation. This high level of inflation has triggered increases in interest rates, making the cost of borrowing more expensive for household and businesses, adding to the cost pressures they face.
These challenges are set against a wider economic and social context which will shape this government’s strategic approach in responding to the challenges posed by the high inflation economy. Climate change concerns, demographic factors such as rapid growth and aging of the population, and the stark necessity for affordable housing are all considerations at the forefront of policy formation currently. These factors will remain cornerstone priorities as we develop our policy response to this cost of living crisis, ensuring that our policy response is strategic and sustainable.
This government is acutely aware of the negative impact rising prices are having on households and businesses across Ireland. People across Ireland are worried, seeing first hand their monthly food and energy bills rising as a result of the crisis. As we know, high inflation erodes purchasing power, increasing the risk of poverty, particularly for those in lower income groups. However, we must remember that these economic shocks, particularly energy related shocks, while more persistent than first anticipated, have transient elements and that the Irish Economy is in a strong position to respond to these challenges.
Through our efforts, Ireland’s economy has rebounded strongly from the pandemic. The degree of economic scarring left in the wake of COVID-19 is less than originally anticipated and despite the dampening effect of the war on global growth, Ireland continues to demonstrate strong growth domestically. In the second quarter of this year, Ireland reported a growth rate of Modified Domestic Demand at just over 4 %. This growth is set to continue, with Modified Domestic Demand forecast to grow by just under 4 percent again next year. The labour market has also made a notably strong recovery post-pandemic. Employment grew 1.6 percent in Q2 of this year, the second highest rate in the EU. Unemployment in July was recorded at just 4.2 % in July. In turn, the Irish labour market is supported by Ireland’s growing population which now stands at just over 5 million according to the 2022 Census.
Strong Exchequer returns bolster Ireland’s economic position. The Department of Finance reported a surplus of €6.3 billion at end August. This is driven by corporation tax but also strong returns in income tax and VAT receipts, reflecting the recovery in post-COVID consumer spending as well as strong investment in housing and industry.
As such, while this government acknowledge that we cannot fully insulate individuals from the challenges the high inflation economy poses, considering our strong labour market and robust taxation revenues, public finances are in a very solid position to help support households through this cost of living crisis. The economic and financially stable position we are currently in was secured through this government's measured and foresighted strategic approach in tackling our economic recovery post-pandemic. We aim to replicate this successful strategic approach when tackling the new economic challenges facing us now.
To date, significant resources have already been committed by this government to alleviate higher living costs, with measures focusing on the underlying problem of rising energy prices.
Under Budget 22, a €1.2 billion package of expenditure measures was introduced to help offset cost of living pressures for households and businesses across industries. This package included a wide array of measures including; increases in social protection payments; an additional Fuel Allowance and Working Family Payment; social and affordable housing funding; enhanced student and childcare supports along with an income tax package of just over half a billion euro.
Building on this, since Budget 22, an additional €1.3 billion has been provided in expenditure and taxation measures to help alleviate the negative effects of rising costs on individuals, focusing on minimising the impact of rising energy prices. This funding provided additional supports such as a €200 Electricity Credit for domestic account holders; a 20 % reduction in public transport fares and additional fuel allowance payments. On the taxation side, to help with rising fuel costs, a temporary reduction in the excise duties charged on petrol, diesel and marked gas oil was introduced alongside a reduction in the rate of VAT on the supply of gas and electricity.
Budget 2023 will compliment measures we have already introduced, focusing on further cost of living supports. Supporting households and businesses through fiscal measures in an effective way, while simultaneously ensuring the stability and sustainability of our public finances is a key priority of this department as we move to finalise Budget 2023.
Our aim with Budget 2023 is to design further policy measures which strive to be timely, targeted and temporary and, in this way, best support those most exposed to rising costs but also alleviating cost pressures for individuals across Ireland. The policy response will include targeted measures for vulnerable individuals most exposed to the cost of living crisis, and also measures that have a broader application that will support those with an income that puts them above the eligibility threshold for state benefits as they also struggle with rising energy and other costs. We are very aware that everyone is feeling the negative impact of the cost of living crisis and measures considered as part of Budget 2023 will reflect this.
Budgetary measures to be announced on the 27th of measures will reflect this government’s continued prioritisation of investment in public service and capital infrastructure. Measures will also support our continued response to Brexit, COVID-19 and the Ukrainian humanitarian response. In addition to a sizable package of spending and taxation measures, we will also announce a separate package of cost of living measures. This cost of living measures package will help all of those struggling with soaring energy bills, increasing food prices and also other living essentials.
Measures will be designed in a way that considers the long-term strategic direction of Ireland such as wellbeing and equality objectives, the decarbonisation of Ireland’s economy, strategic investment in infrastructure as set out in the National Development plan and ensuring quality public services through investment in public service pay. In this way we ensure the long-term sustainability of our national public debt. Furthermore, this department is acutely aware of the potential indirect impacts of additional fiscal measures on the economy. Additional measures aimed at domestic sectors in particular, may fuel further price inflation, causing further negative cost of living effects for individuals. There is also a risk that heavy fiscal policy intervention could negatively impact on price signals which reflect genuine capacity constraints, ultimately distorting these signals. In this way, with Budget 2023 we aim to design an effective policy response to the challenges we face, minimising these potential indirect effect so as to not add to inflationary pressures.
With Budget 2023, we are striving to strike a balance between helping to mitigate cost of living pressures for households while simultaneously ensuring the sustainability of our public finances, investing in the future of our economy and quality of life in Ireland. This demands a co-ordinated, intelligent and measured approach to policy design, a process which is supported by experts across the Civil Service including the Irish Government Economic and Evaluation Services.
IGEES have the primary objective to build capacity in policy analysis through expert knowledge across Government. IGEES members across departments deliver a broad range of high calibre analysis, which supports the policy decision making process and has helped shape future policy formation for the better. The high quality work carried out by IGEES members across departments ensures that policies are better targeted, more efficient and have more effective outcomes. Some of this excellent policy analysis and evaluation will be presented by IGEES members over the next two days.
This work builds an evidence base which helps inform policy making in crucial times such as Budget. A focal part of this is the research published as part of the Spending Review Process. This process is an IGEES initiative which aims to facilitate policy analysis and evaluation to inform expenditure re-prioritisation in the context of the Budget but also the development of policy analysis and evaluation in support of the service-wide agenda of evidence-informed policy making. In August, Minister McGrath published the first tranche of the 2022 Spending Review Process with the second tranche due to be published this autumn.
IGEES has grown in recent years in both size and in terms of impact. As the IGEES network grows its links and collaboration with other reputable policy institutions has also grown. IGEES collaborates on important work across departments with members of the CSO, the ESRI, academia and other public policy agencies and bodies in Ireland and abroad. This collaboration builds upon wider pre-budget engagement facilitated through the National Economic Dialogue with community and volunteer groups as well as representative from industry. Collaboration between institutions and government fosters creativity and knowledge sharing, bettering policy formulating and decision making and resulting in better outcomes for all.
Supported by the strong evidence base created by IGEES through the Spending Review Process and through collaboration with wider institutions, I am confident the fiscal policies proposed as part of Budget 2023 will be effective yet sustainable and will suitably target the most vulnerable in society while, most importantly, supporting households and businesses across Ireland as necessary.
The backdrop to this year’s Budget is unprecedented compared to recent years and one of increasing uncertainty in the face of rising energy costs, inflation and economic uncertainty. Supporting households through fiscal measures in an effective way, while simultaneously ensuring the sustainability of public finances, is a key priority of the Department of Public Expenditure and Reform, as we move to finalise Budget 2023. While the drivers of these challenges currently faced are outside of the direct influence of this government, given Ireland’s strong economic position and supported by a robust evidence base, we can tackle the challenges posed in a strategic and sustainable way. We will respond to this cost of living crisis, utilising expert knowledge and leveraging intelligent and measured policy design to implement measures which will alleviate cost pressures felt across households and business in Ireland and support those most at risk in our society, with the aim of ensuring that the impact of the negative effects of these unprecedented times are minimised.