Money, Money, Money

0:00We are kicking off the second hour Thursday's morning focus with households who are facing fresh financial pressures with oil, food and electricity costs continuing to rise. While mortgage holders are also watching closely, as another European central bank interest rate increase is expected. The ongoing conflict involving the U.S. and Iran and disruption around the straight of Hormuz are adding further uncertainty with concerns that higher energy prices could feed into inflation and make the coming winter particularly difficult for families. So what can households do to protect themselves and can the government realistically do an often October's budget to ease the pressure? Joining me to discuss all of this is Manon Elzat. A thing or two about it, the NSNative and the UCD assistant professor of social policy, Michal Collins. Michal, thanks very much for joining us on the show. Good morning. We have oil at energy prices rising, food prices continuing to increase and now the prospect of further interest rate rises, so a host of good news for people this morning, Michal, are we heading into another particularly difficult period for household finances?

1:01I know people would say, well, it's been a difficult period for quite a while, but is it likely to become even more difficult? Yeah, it certainly feels like we haven't escaped from it for a couple of years, Alan. Yeah, I mean, you talked about uncertainty at the start there and that's certainly the key word here because every time we think things settle down, then they blow up again, whether it's the straight of horror moves or whether it's the Ukraine and Russia, whether it's indeed the kind of instability that we're seeing now in the government borrowing markets, the bond markets internationally as well and so on. So it's a real period of uncertainty for the world economy. And if anything, that's sort of increasing and yes, then that's making it the way across to all of us in terms of our living standards. Yeah, it feels like a repeat of where we've been for the last few years, Alan, and I'm sure most of your listeners are feeling like that too, as we head into another winter where almost inevitably at this stage, we're going to see increases in the price of electricity

2:06increases in the price if you were all driven by those, well, pricey by those shortages coming out of the straight of horror moves and that kind of situation that has just multiplied into complexity after complexity and it does seem like it's going to be quite difficult to see a resolution there. And then on top of that, you've seen the Ukrainians assert themselves very strongly actually in their war with Russia or Russia's war with them rather and have begun to start taking out a lot of the fuel capacity and refinement capacity in Russia with their drones. Of course, that means then that there's an impact on the supply of oil, not so much to Russia, but to places like China and India and other countries that take Russian oil and then that's going to have a bigger impact into the global economy and the oil prices as well. So kind of all of that together is going to drive up oil and of course, as you were saying earlier, what that really means is it will drive up petrol, it will drive up the price

3:07of diesel, it will drive up the price of electricity, it will drive up the price of gas, which is really the key driver in our price of electricity. So all of that puts us in a very difficult position. Now, how fast all that happens is in a sense unknown and then similarly, if it were possible to get a solution to the straight-of-formhood and possible to get a solution to the Russia-Ukraine situation, all of that could switch off very rapidly, but those are ideals that seem quite far away at this point. We also see, Michal, the European Central Bank, being expected to raise interest rates again next week with inflation in the Eurozone now above 3%. We're hearing anyone on a variable rate or track or mortgage being urged to examine their options. So what does another 25 basis point increase potentially mean for Irish households, not just on mortgages, but in other ways too? Yeah, it is. And so we long, long time ago, I looked at the date for I talked to the Thorin in 1992.

4:08We passed a thing called the Master of Treaty. And that gave the part really setting up the Euro. And then the Euro took another couple years, was in 2001, when the Euro came along, but the kind of infrastructure was going in back then. And one of the points that was setting up the European Central Bank and setting up a job for the European Central Bank and the job that the people of Euro gave the European Central Bank was to keep inflation low. And the target for the European Central Bank is 2%. And the logic of that is that as prices go up, as indeed, people will be feeling at the moment, we all are worse off. And so it's okay for prices to increase at a kind of slow pace, which is kind of the idea of the 2%. But beyond that, it begins to either way at people's living standards, it makes it more difficult for us to pay our bills. Everything is getting more and more expensive and so on as I think we've all been living true for the last couple of years. So there have been jobs to keep inflation low. And so they are required, therefore, to act when it's the case that inflation starts

5:10to go above and well above that 2% target. So yeah, the 3% or 3.3% figure they came out with over the last couple of days points to a problem here in Ireland, the latest CSO figures put us at about 3.4%. So everything on that, what that means is on average, everything costs 3.5% more this year than it did a year ago. And of course, none of our incomes are rising at that pace and none of our pensions and our welfare payments and so on are rising at that level. So all of us are worse off today than we were before. Now you don't need to be an economist to know that because I think everybody up and down the county will be experiencing that currently as they go in and out of shops and everything else. So that's going to kind of trigger them across Ireland to try and slow things down a little bit. So they're very cautiously because they're sort of balancing economic activity with inflation as well. And so that kind of quarter of a percent increase they will do.

6:11So they signal that very clearly and then it will be formally adopted later in the month. And yes, that means that people who have track or mortgages, which are really mortgages from back in the kind of Celtic tiger era, those mortgages will immediately go up. But then it means anybody else borrowing whether they're individuals or whether they're businesses and so on will end up paying more. The logic from the central bank view is that it will take a bit of money out of the economy and slow things down. But of course that makes life more difficult for people and for businesses as they begin to do that as well. But that's the aim for it. And so yeah, we're going to begin to experience that. And in fact, if you look at interest rates over the last kind of two or three years, or maybe five years as we've gone through various cost of living crisis, they got up and they've come down and they've gone and they're on their way back up again. So absolutely it feeds across and it'll be part. And I know that kind of a picture, I suppose, of higher living costs for people, which you're right then puts some pressure on the government to respond. In terms of the mortgages, Michal, I mentioned people on a very, very better tracker being

7:12told to examine their options were seen a significant increase in those looking to switch mortgage providers. I just wonder if switching likely to be worthwhile for many homeowners or does it depend very much on individual circumstances? Yeah, it probably really does depend on individual circumstances. The certainly people should shop around is kind of one of those really awkward things that the sheer level of work associated with moving your bank account or moving your mortgage or whatever is so big that people tend to avoid it. I certainly remember reading back along the people who are far more likely to change their spouse than their bank over time. It kind of gives you an indication of the kind of scale of complexity. Now I think they've tried to simplify that over time. Many people as their mortgages roll over should begin to look at that, but I suppose everybody will move together. So, you know, that quarter of a percent will filter true and you'll see very slowly all of the banks bit by bit begin to pass those increases on. So it's going to be very hard for people who are borrowers to avoid being exposed to that.

8:20Now it's a small increase initially, clearly on welcome, but it's a small increase. It may be if we begin to see inflation continue to rise, and that honestly is the outlook at the moment given the earlier things that was mentioned. Then, you know, that's probably the first of a few increases in interest rates over the next, you know, the six months from here on out. So that does prove some challenges for individuals. The government came along in a previous budget when the interest rates went up and bought back in mortgage interest relief for people which they at least formally are phasing out by the budget this year. It would be interesting to see and there'll be a bit of pressure on the government to bring that back in again to kind of refund households a little bit for the increased interest rates that they've had. And there's other pressure, obviously, emerging on government too. But of course, the challenge for government is they've got to pay for this. Luckily, we've got a whole lot of corporation tax money coming in, which allows government

9:23to do things which is quite unusual in terms of other countries. But, you know, it does come out of cast, I suppose, and that ultimately there's less of that money left for us to invest in social housing or invest in infrastructure or invest in all the other things that we should be doing. And so there's that kind of real challenge for government of balancing the short term immediate with the longer term strategic. Which is going to be very not just for them, very difficult, I guess, for any government to do. And when people hear about the amount to be made from corporation tax and so on, they'll think, well, the government will be able to do a lot in October's budget. But as you say, it's trying to plan for the future and long term infrastructural projects, capital projects, planning for a rainy day, but also trying to keep some back because no one knows how long the situation in the Middle East is going to affect the world at large. How much room do you think the government realistically has, me, all to ease the pressure on households,

10:23be it, you know, we've seen temporary cost of living measures in previous budgets, be it energy credits and so on. We hear the opposition and others saying that there is a need for more long term measures. Should they and can they bring in long term measures to help households or will any sort of relief that we see in October's budget likely, is it likely to be in those more kind of what's so called one-half payments that actually we've seen more than once? Yeah. I think the government has to be preparing for rainy days too. And I suppose honestly, as an economist, I'm worried, certainly looking at where the worry is economy is at the moment. You just sit back, look at this and think at some point, at some stage, something is going to trigger a major economic correction. It may very well be what's been happening in the US over the last while with their debt passing 40 billion and so on. And the other kind of things that are happening related to that.

11:24But as well as government are conscious of that too, so they've got to be kind of careful of what is around the corner and that's kind of bit unpredictable. They have less room than people might think. And that's a great challenge for the government. And indeed, they're probably less room than would seem to be indicated by a lot of the announcements that governments are making. If you listen to the various ministers suggesting they'll do this, that and the other and you begin to top them up, they are well beyond the room that the government has already given itself for the budget. And that's in the context of some European commitments or how big the budget can be. So I think the government has some quite difficult choices to make. They can go and raise taxes in some areas, which will allow them to cut taxes and fund all those things elsewhere. And that's an option for a government. You won't know if many ministers are talking about raising taxes, but that realistically is the space therein if they wish to start spending more. I think we will see some short-term measures in the budget. And government will have to begin to think about how they prioritize things. Do you make long-term reductions in income taxes or do you prioritize short-term supports

12:29through the electricity payments that we were all receiving for a few years and other kind of short-term subsidies? I suspect as things go on over the next couple of weeks and we're just over a month out from the budget, we begin to see those short-term, one-half measures come back into view. But of course, you're right, Alan, it's the funny thing about the name. They're presented as one-half measures, but they keep going. And it's very hard when you bring in a one-half measure to take it away, people have expectations that it will continue in politicians and expectations that they can continue to deliver it. And I think for the government to communicate this, an economist like me will tell you they shouldn't be cutting income taxes at the moment, they should be doing other things. And both government are quite determined to cutting income taxes, and that's why I was up a lot of the money that they have plus all the other expenditure commitments that they have. So they're in a quite tight space and they're going to have to find how they can wriggle their way out of it over the next while, but they also have people like the fiscal council

13:33and the European Commission, bringing down their back a little bit saying, you've got to be very careful here not to expose the government and the economy to, in effect, what we did back prior to the big crash in the early 2000s, which is, you know, exposes to a point where if things go wrong, for example, with the corporation tax, that the economy would suddenly over a couple of months be in a very difficult position. And there's certainly potential for that to emerge over the next year as well. Yeah, it is a veritable gourd in not for them, that is for sure. Just for a little bit of go, me, Halle, I mean, even if the government was minded to spend more than or go, you know, a fair bit beyond just the so-called one-off measures to try and help people, is there a danger if they spend too much trying to cushion us from rising prices? It could actually make the inflation problem worse. Indeed, it will, it's exactly that, you know, if they give me more money, I'll probably spend that money, which, of course, will just drive up demand in the economy. The whole purpose of increasing interest rates is to take money out of the economy and

14:38slow things down. So there's a kind of a balance there and you'll see that kind of tug-of-war between the government on one side and the central banks on the other side over the next while. We have to keep our eye on the fact that, well, you know, if inflation keeps rising, well, then it has big, big impacts on our living standards. And if you look back over the last six or seven years, prices today are about 23% higher than they were five or six years ago. None of us have had that increase in income over that period. And therefore, if you look at us in 2026 and Benchmark was first as our living standards in 2020, almost everybody is worse off than they were before because of those increases in prices. So we could do without that being repeated for another couple of years because it does ease away at our living standards. And that's really quite problematic. And of course, right around the county, people are feeling that very visibly as they go to the supermarket and pay their bills and deal with their electricity bills and so on so forth, it's quite noticeable. And it makes life very, very difficult.

15:38All right. We do have to live there for the moment, but I suspect we'll be chatting to you around budget, Tim Mehal. For the moment, thanks as ever for joining us on the show. Nice to talk to you, Alan. Thank you. That's the NSNative and Assistant Professor of Social Policy, UCD Mehal Collins.