The latest cost-of-living package is an important moment for the Government. It has resisted calls for significant extra permanent spending and for an extension of the universal energy credits. The goal is clear – to try to phase out the supports introduced last year, because the rate of inflation is now easing. In turn this will leave leeway in next October’s budget –including the possibility of a return of energy credits for another period.
The reaction from the Opposition was predictable, arguing that the measures were insufficient and that much more was needed by way of permanent supports and action to help under-pressure groups like renters. The Government argues – with some justification – that these were beyond the scope of yesterday’s package. But with prices remaining high, even if the inflation rate falls, political pressure will remain high.
In the face of the first fall in living standards since the financial crisis, this package was never going to satisfy all sides. It does offer significant and generally targeted supports aimed at less well-off households. Following another ¤200 energy credit to be paid next month, it is reasonable to wait and see what happens to energy prices and reconsider the issue ahead of next winter. Otherwise the universal credits could become semi-permanent supports. If energy prices do remain high and longer-term supports are needed, then these will need to be targeted at those who need them.
It is also significant that the package includes the phasing out of the special VAT and excise tax measures, though it remains to be seen whether the Government will actually bite the bullet on the 9 per cent VAT rate for the accommodation and hospitality sector in September. The official “spin” that the extension will hold down inflation over the summer is correct – but lobbying of backbenchers by the sector is what really mattered. The Coalition will hope that lower wholesale prices will take the sting out of the gradual return of higher excise on fuel and VAT on energy bills.
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Politically, the package gives a little for all sides with significant, though once-off, welfare measures, a compromise on the fuel tax issue, where the Green Party was pushing for the ending of tax cuts on polluting fuels and some wider supports. The reaction of the public, which has got used to very significant State supports through Covid-19 and the €11 billion budget package, will be interesting to watch.
The Government is correct to leave some room for manoeuvre heading towards next winter. However even if inflation falls, by autumn prices for essentials like energy and food are likely to remain well above the levels of recent years, keeping pressure on living standards. At that stage, more permanent supports for those on lower incomes may be needed, as well as some targeting of squeezed working households.