Economy

We are on a knife-edge heading into the autumn – The Irish Times

Eye-watering rises in gas and electricity bills have led to predictable demands for magic solutions. There is a lot that can be done, but there is no way of switching off the crisis. All the various proposals that are being floated – windfall taxes, prices caps, cash for households and so on – are worth examining. Big supports for poorer families are essential.

But the bottom line is that Ireland is an energy importer and is paying a lot more because of the stratospheric prices on world markets – and inevitably households and businesses will take some of the pain. Most of the rest will fall on the taxpayer.

Whatever way you slice and dice the policy options available to Ireland – and the European Union – someone, somewhere ends up paying. Talk of restructuring the EU energy market and decoupling electricity prices from the soaring cost of gas – or perhaps putting some cap on them – is worth looking at. But remaking a complex market in place for years in a few weeks is really tricky. And there are risks, such as damaging the incentives to produce power, or maintaining gas demand at current levels when we need to try to reduce it. A tax on windfall profits being made by energy companies is being considered – it would raise some cash, but not a huge amount in Ireland’s case. The Government will hope for some relief as a result of European policy changes, but best not to expect it to be a game changer.

This has all left us on a knife-edge as we enter the autumn. Minister for Finance Paschal Donohoe has been selling the message in a round of interviews this week that the Government can – and will – help households. We are promised a €6.7 billion budget for 2023 and a separate cost-of-living package for this year that could cost another €2 billion. It is a measure of the spot we are in that such vast amounts of the cash can only close some of the gap for households.

One reason the Government was prepared to pay up for a higher than expected public sector pay deal was to stop the slide down a slippery slope to wider social unrest – which a series of public sector strikes could have started

And here we come to the knife-edge. If wholesale energy markets ease back and inflation peaks soon enough, then we can hope to muddle through. The underlying economic picture heading out of Covid-19 is better than anyone could have hoped for. And for now tax revenues are strong. The State has scope to take a fair bit of the financial hit this year.

There is, of course, a more worrying scenario. Wholesale energy prices could head higher still. On the basis of what is forecast in the United Kingdom, comparison website Bonkers.ie says that average household energy bills has risen from €1,900 before all this started to about €4,000 after the latest increases and could hit €6,000 by early next year. The companies putting solar panels on people’s houses will be busy.

But the wider economic and political consequences of this kind of scenario are really significant. We will be back to emergency Cabinet meetings and addresses from the Taoiseach. In this kind of scenario, policies that look risky one week look like the only way out a few weeks later. Whether policymakers here and across Europe will have to break the emergency glass and start taking even more dramatic action than what is already in the pipeline – ignoring the risks and unintended consequences that normally stop big policy moves – is one of the big questions.

Which scenario transpires depends on wholesale energy markets – and particularly the gas market – which simply cannot decide right now what the appropriate price should be. Prices have swung by 25 per cent plus in the last week alone. In this scenario economic forecasts are merely guesswork.

Ministers will be concerned about the risks. One reason the Government was prepared to pay up for a higher than expected public sector pay deal was to stop the slide down a slippery slope to wider social unrest – which a series of public sector strikes could have started, if the more malign scenario plays out.

The promised changes to our planning system are now critical – we simply have to find a way to get renewable investment moving much more quickly

The public sector pay offer was relatively generous – even if the rise of 6.5 per cent up to the end of next year is below inflation, now running at about 9 per cent, public servants will have a cushion against higher prices and will gain too from the budget. Fully matching price rises would have left little for any other budget-spending measures and also risked spurring inflation further by increasing demand. This is the template the Government hopes will hold across the economy – cushioning the blow.

Taoiseach Micheál Martin said energy prices could keep rising until early next year, but inflation could then ease. But what happens then? Even when the inflation rate eases back, prices will remain high. Unless there is a fall back in prices on energy markets, we could be stuck with much higher energy costs for some years. For now the Government has little option but to do its best with a lot of once-off cash this year and some longer-term welfare and tax measures, and hope for the best. But the world is changing and the era of low inflation, interest rates and cheap goods may be drawing to a close.

So may the era of cheap energy. At least until the renewable revolution changes the balance. And here Ireland cannot lose sight of the longer-term imperative of developing wind – and solar – energy and undertaking the associated investments in our network. The promised changes to our planning system are now critical – we simply have to find a way to get renewable investment moving much more quickly. This is a much greater economic risk than the long warned-of fall-off on corporation tax.

Ireland lost sight of the longer-term imperatives in areas like housing and social investment after the financial crash – and we are still paying the price. Under the pressure of dealing with what is to come this winter, let’s not make the same mistake again in terms of planning our energy future.

Leave a Comment