Inflation is running at around 8% in the eurozone and with historic pay agreements based on the Central Bank target rate of 2%, household income is being squeezed.

Irish trade unions have called explicitly for the restoration of real income, which would imply across-the-board wage increases additional to whatever is carried over from earlier settlements. The extra inflation in Ireland is close to the eurozone average so the pay increase for Ireland would be somewhere around the 6% level.

Last weekend there were marches in Dublin and other cities demanding Government action to restore real incomes. The Government is under immediate pressure to concede a new pay increase to public service employees, of whom there are 340,000.

According to press reports a 5% hike has been offered and rejected. This would be additional to a 2% increase for 2022 carried over from an earlier deal and some public officials would also be in receipt of annual pay increments.

The public service pay bill is around €24bn, so a 6% award would have an annual cost of around €1.5bn.

Costs

The Government has already incurred costs arising from its efforts to soften the blow to household incomes, including reductions in fuel excise duty, increased supplementary welfare payments and the electricity bill credit.

The full-year cost has been estimated at €2.4bn, and there are numerous other items which have not been provided for in budget estimates, notably the €2.7bn for the mica redress scheme and the huge cost overrun on the National Children’s Hospital, due to cost €2bn versus an initial figure around one-third of that level.

A billion here, a billion there, and soon you are talking real money.

To complete the picture, the Tánaiste has been talking about reductions in income tax and the Minister for Finance has been expressing concern about over-reliance on corporation tax revenues, which he thinks might fall in due course.

New demands for public expenditure are manufactured daily – the old age pensioners will expect whatever the public service are awarded for example, and the health budget has yet to be brought under control.

Those who recall the eurozone debt crisis which followed the banking crash of 2008 have been expressing alarm

The rate of interest charged to eurozone governments on their borrowings has been trending upwards rapidly.

The more indebted governments, a category which includes Ireland, are especially vulnerable, and the European Central Bank has begun to scale back its support to the bond markets. All eyes are on Italy, which has the greatest debt of any European country, and the interest penalty on rolling over Italian debt has been rising ominously.

Those who recall the eurozone debt crisis which followed the banking crash of 2008 have been expressing alarm, including the Fiscal Council and the Central Bank of Ireland.

Greece, Ireland and Portugal were unable to borrow at all from 2010 onwards and ended up in IMF programmes.

There is no point in anyone pretending that there are no risks for Ireland in another borrowing binge, which is for practical purposes the declared policy of the opposition parties and, implicitly, of many on the Government benches.

If you favour more public spending and tax reliefs, you are in favour of a bigger budget deficit and a further addition to the burden of State debt, likely to reach around €240bn by year’s end. Relative to State revenue, this is amongst the eurozone’s highest, and adding more debt is risky.

Risk

The risk is another failure to sell Irish Government bonds in the market once the ECB has withdrawn support.

Governments have enjoyed a holiday from reality these last few years since the ECB responded to the COVID-19 emergency by offering a backstop to the bond market, placing a lid on borrowing costs even though governments borrowed freely.

This unusual phase of very low interest rates has come to an end, as was inevitable once inflation took off. The ECB remains committed to the 2% target, will do whatever it takes to deliver and will want to see real progress before the end of 2023.

This means higher interest rates for borrowers at retail banks and a tougher assignment for governments with bonds to sell.

Higher budget deficits have direct and hidden costs. The direct cost is a bigger bill for debt service, which actually fell in recent years despite the rising level of outstanding debt, due to tiny interest rates. The hidden cost is the increased risk that it all ends in tears, as happened in the summer of 2010 when Ireland could not sell debt at any price and was forced into the arms of the troika.

There followed a three-year programme of tightening budgets when the economy was weak and unemployment stubbornly high. All of the political parties, and much of the mainstream media, are courting a repetition. They have short memories.