‘We’ll be poorer for longer’ if inflation gets embedded in economy, Donohoe warns – The Irish Times

“We will be poorer for longer” if inflation seeps into the Irish economy, Finance Minister Paschal Donohoe has warned. The 2023 budget must therefore strike a balance between supporting those most affected by the current price tightening and avoiding amplifying existing inflationary pressures, he said.

In an interview with the Irish Times, Mr Donohoe also appeared to rule out the idea of ​​an energy price cap similar to that announced yesterday in the UK, suggesting it poses too great a financial risk for the state and bears a “striking similarity”. to the notorious bank guarantee of 2008.

“We need to find a way to help households and businesses buy enough to help them deal with the more severe consequences of inflation, but at the same time we need to try to avoid doing things that put global inflationary pressures firmly in Ireland.” Embed economy,” he said.

The government is expected to present a €6.7 billion core budget package next Tuesday, with a further €3 billion earmarked for one-off measures aimed at easing current pressures on the cost of living.

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To manage the risk of further inflation, the government has sought to stay within its core spending envelope while limiting the inflationary impact of one-off measures, which will likely include a double Christmas bonus for welfare recipients. He said his department models the inflationary impact of various fiscal policies.

Finding the right balance between “targeted and broad” is a key challenge, he said, while the impact of higher inflation has not only affected low-income households, but also middle-income households “that pay too much for targeted social.” Networks deserve welfare but don’t earn enough to cushion the impact of rising prices.”

Budget 2023: what to expect

Mr Donohoe said he had significant concerns about an energy price cap as it would be near impossible to predict costs, whilst it would also send the wrong signal in relation to reducing energy consumption. The 2023 budget is expected to include a range of energy credits totaling up to €600 per household.

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The government cannot spend at the same rate as during the pandemic because the inflationary environment is different and borrowing costs are significantly higher. “Is the benchmark for an economic response [to a shock] will always be Covid, we will quickly create an economic shock of our own if we deal with it,” he warned.

With excess corporate tax revenue being used to fund much of the government’s budget package, Mr Donohoe said he was keenly aware of the concentrated nature of the corporate tax base, but declined to say whether some of the windfall would go to the rainy day fund.

With talk of a new 30 percent income tax rate on the back burner, Mr Donohoe is expected to widen income tax margins to ease the burden on middle-income earners. He acknowledged that by international standards workers here end up paying the higher rate of 40 per cent on relatively low wages – anything above €36,800 for a single person – and that this is “a key difference” between Ireland and other countries.

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Another aspect of the budget the government is working on is a support program for companies affected by the current price hike. However, he dismissed the notion that the Covid Restrictions Support Scheme was a blueprint as eligibility for the scheme was based on sales, which was not appropriate in an inflation shock scenario.

Fine Gael is hosting a special day-long conference at Thomond Park in Limerick on Saturday to assess the views of small businesses and businesses, where Mr Donohoe and Tánaiste Leo Varadkar will speak.

Referring to the Eurogroup controversy, Mr Donohoe dismissed suggestions that the dispute had damaged relations between Fine Gael and Fianna Fáil. The coalition’s rotating Taoiseach plan, with one party heading Treasury while the other holds the office of Taoiseach, has raised questions about Mr Donohoe’s future role as president of the influential Eurogroup when he ceases to be finance minister at the end of the year.

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