Simon Coveney (Cork South Central, Fine Gael)
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As a small, open trading economy Ireland is exposed to global inflationary pressures, including fluctuations on international markets for energy, commodities and food. Ireland is effectively a price taker on most international markets, and many of the drivers of Irish inflation are outside our control. Our remote geographic location can add to transport costs for goods, which along with our small market size can add to costs for businesses.

As a result of these inflationary pressures, input costs have gone up for many businesses. However, wholesale price inflation has levelled off across a number of areas in recent months, with Irish wholesale electricity prices 26% lower in May 2023 than 12 months previously. While wholesale prices for construction products rose by 9.1% in Ireland, overall, manufacturing producer prices were 1.1% lower in May 2023 than May 2022.

The Government has been proactive in limiting the fallout from higher rates of inflation. A total of €12 billion – 4½ per cent of national income – has now been provided in direct relief to absorb some of the impact and ease the burden of inflation on households and businesses.

The main programme introduced by Government to alleviate cost pressures for small business was the €1.3 billion Temporary Business Energy Support Scheme (TBESS), which has been subject to amendments to allow more businesses apply for this grant. The scheme has been extended to end of July 2023 and the monthly cap has been raised from €10,000 to €15,000 since 1st March 2023.

The Government also approved the following which will help businesses going forward.

• The temporary reductions in VAT on gas and electricity, from 13.5% to 9%, has been extended to 31 October 2023 at an estimated cost of €115 million.
• The temporary reduction in VAT on Tourism and Hospitality, from 13.5% to 9%, has been extended to 31 August 2023 at an estimated cost of €300 million.

Alongside these supports, as part of Budget 2023, the Government introduced the €200 million Ukraine Enterprise Crisis Scheme, which assists viable but vulnerable firms of all sizes in the manufacturing and internationally traded services sectors manage the economic impact of the current crisis in Ukraine. The scheme is aimed at businesses experiencing significant difficulty as a result of increased energy costs. Through supporting businesses in meeting energy costs, these measures will help protect the jobs of those working in impacted sectors.

Government has supported enterprise though a period of excessive energy costs. However, Government cannot fully insulate businesses from developments in international energy markets indefinitely. Firms also have a key role in reducing the impacts of inflation.

Recent ECB analysis examined the degree to which inflation is being driven by increases in wages compared to profits. It establishes that there has been a significant increase in corporate profits throughout 2022 across multiple sectors (including the agriculture sector supported by rising food prices). Similar analysis from the Central Bank of Ireland suggests that unit profits (gross operating surplus as a proportion of gross value added) has contributed significantly to ‘Gross Value-Added inflation’ across both 2021 and 2022, at circa 5 per cent per annum. Unit profits increased by about 10.5 per cent in 2021, and by just below 9 per cent in 2022. The unit profit contribution to GVA inflation averaged 1.7 percentage points per annum from 2001 to 2020, much lower than the circa 5 percentage points in both 2021 and 2022. This would suggest substantial pass-through of increased input costs to consumers. With the Central Bank of Ireland forecasting a period of disinflation for Ireland, the price increases passed on to customers to date will provide a buffer for firms to absorb wage increases without the need to increase output prices.