The Economic and Social Research Institute (ESRI) has said that the government should resist public sector wage demands as much as possible to check inflation.
The influential policy think-tank said that Economic Minister Pascal Donohoe will have to rein in tax cuts or spend-for-spend expectations in Budget 2023 to avoid further pressure on prices.
In its latest quarterly economic commentary, ESRI said any wage hike should be “carefully considered”, while reducing the taxation burden would “constitute an undue incentive”.
“From a national point of view and from a macro-economic point of view, government policy at the present time is not aimed at promoting inflation,” said ESRI economist Kieran McQueen.
“We’ve talked about this increased risk of domestically generated inflationary pressures because of the tightness of our labor market and how strongly we’re growing.
“The government has to show as much discipline as it can.”
The warning is likely to strengthen the government’s reluctance to further loosen purse strings as consumers deal with the sharpest annual price hike in 40 years.
Inflation hit nearly 8 percent last month as energy prices soared following Russia’s invasion of Ukraine and supply-chain disruptions following the pandemic.
In the past month, Mr Donohoe has repeatedly warned that there is limited financial capacity to cushion the blow from rising cost of living.
He and his officials have instead emphasized the need to reduce the deficit and pay off debt, despite the state balancing the books last month, after two years of heavy spending on support for the state’s COVID-19.
While ESRI is forecasting a general government surplus of €1.6bn by the end of the year, the growth outlook is softening.
Mr McQueen and his ESRI colleague and report co-author Conor O’Toole see the risk on the downside.
“We are seeing some major winds impacting domestic demand, particularly the continued rise in inflation,” Mr O’Toole said.
“This is likely to negatively impact the consumption channel in particular, but also the broader outlook, with the uncertainty due to the war in Ukraine likely to impact the investment outlook.
“And we are also moving towards a period where central banks are becoming increasingly aggressive.”
He said rate hikes coming from the European Central Bank would affect consumer spending, business investment and house prices, cooling a hot Irish economy.
Despite the warnings, ESRI still expects growth in revised domestic demand – considered the most accurate reflection of Irish economic growth – to reach 4.4 pc this year, down from an increase of 6.5 pc in 2021.
Gross Domestic Product (Gross Domestic Product) growth for this year is projected at 6.8 per cent, reflecting the strength of multi-.
National sector, especially IT and pharmaceuticals.
ESRI is also predicting “full employment,” in which the unemployment rate will drop to just 4 percent by the end of next year.
Still, consumer confidence has declined, with an 18 percent drop since the beginning of the year, the lowest level in the European Union.
Mr O’Toole said ESRI noted a “persistent decline” in signs of household savings as money set aside during the pandemic was now “rising in price”.
This is a far cry from what ESRI forecast last summer, when it said Irish consumers would spend freely in 2022 as a return to the “going out economy” following the Covid lockdown.
The fact that inflation was running higher than real income growth meant that despite very strong growth dynamics in the country, people were likely to feel poor.
“Gross Domestic Product hides the real situation on the ground,” McQueen said.
“The risks are definitely on the downside.”
However, there may be some ups and downs for the Finance Minister at the time of Budget.
ESRI believes the €3.5bn contingency fund set aside this year is unlikely to be spent, leading to additional spending spread.
“There is still some financial scope to help those most affected by the high cost of living,” the report said.
“However, it has to be done in a targeted way.”