The government is aiming to craft next year’s budget so it does not stoke further the kind of price pressures that have already pushed inflation to a 40-year high, said Finance Minister Paschal Donohoe .
r Donohoe warned at a conference on Friday that the budget cannot “absorb all of the price shock” facing households because it could risk fueling further inflation and racking up more debt at some point where borrowing rates begin to rise.
“The days of cheap financing are over,” Donohoe told the Economic and Social Research Institute (ESRI) annual budget conference.
“We will target the lowest level of borrowing necessary to respond to the various developments and tensions that are occurring in society and government,” he said.
“We will, of course, continue to recognize and help address the cost of living challenge, but overall we need to prepare and then present a budget that does not in itself add to the inflationary pressures that are now clearly in Classes.
“Fiscal policy itself should not be part of the problem.”
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He said the government would aim for “a further reduction in the debt-to-income ratio” next year while trying to wean itself off a reliance on corporation tax.
He called for a “perspective” on spending, given that the economy is no longer in pandemic mode.
The European Central Bank said this week that it would start raising interest rates by 25 basis points in July, with a bigger increase possible in September.
Public debt stands at 96.5% of national income, which is below the eurozone average, but the government is aiming for a ratio of around 80% by 2025.
Meanwhile, inflation hit a 38-year high of 7.8% in May, or 8.2% according to the EU’s harmonized measure.
Mr Donohoe warned inflation was likely to rise further, but not “at the rates we are seeing”.
“There are clear signals that an economic regime shift is happening.”
The government is currently laying the groundwork for the budget, with the summer economic statement to be released “in the coming weeks”, Mr Donohoe said.
In a study released at the conference, ESRI argued for linking Jobseeker’s Allowance to claimants’ past earnings, although it warned that this would come at a cost and could weaken incentive to work.