Real incomes are on the increase. That is the good news from the latest quarterly commentary from the Economic and Social Research Institute (ESRI) which predicts a 2 per cent rise in living standards this year and a 3 per cent increase next year. This means that average earnings are now rising ahead of the rate of inflation, after a period when soaring inflation outpaced wage growth, leading to a big national hit to living standards. In turn this leaves the economy in reasonable shape, according to the ESRI, with consumer spending and investment due for steady if modest growth.
Like the Fiscal Council and the Central Bank, the ESRI is warning that – against this backdrop – too generous a budget package risks pushing up inflation. Instead the focus needs to be on investing in areas like housing, water, energy, schools and hospitals to lay the basis for future growth. And even here, with the economy already at full capacity, care is needed in the short term not to add further to inflationary pressure and to ensure good value for the State.
It is a tricky balance. But along with the Central Bank and the Fiscal Council, the ESRI is also making a more subtle point: if new Minister for Finance Jack Chamber’s first budget is a big giveaway that boosts household incomes, it would leave less room for boosting investment. Not only would it divert cash, but it would risk another inflationary push, in addition to the one coming from higher State investment.
With living standards now on the rise, there is no case for another round of general household supports in the budget. Instead, the focus needs to be on investment, as Ibec has also said in its pre-budget document. But for politicians, the ability to put money in people’s pockets may still prove irresistible.
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