Dublin – A recent cut to excise duty on fuel in Ireland, intended to ease the burden of rising costs for consumers, is likely benefiting higher-income households disproportionately, according to analysis released today by the Economic and Social Research Institute (ESRI). The finding raises questions about the effectiveness of broad-based tax cuts as a tool for addressing the cost-of-living crisis, particularly as geopolitical tensions continue to place upward pressure on energy prices.
The ESRI’s quarterly economic commentary warns that escalating energy costs, linked in part to instability in the Middle East, will push headline inflation in Ireland to 3.2% this year. While the excise duty reduction was presented as a measure to protect all consumers from these rising prices, the think tank’s modelling suggests that roughly half of the benefit will accrue to the wealthiest 40% of households. This outcome, according to ESRI researchers, highlights the challenges of using untargeted fiscal policies to address economic hardship.
A Question of Equity in Fuel Subsidies
Professor Alan Barrett, a former head of the ESRI and co-author of the latest report, illustrated the point with a stark comparison. “If the Government had designed a policy to give 50% of the Apple tax windfall to the top 40% of households, it would be viewed as ‘strange’,” he said. “If you start having policies that direct money towards higher-income people, it reduces your capacity to insulate those at the bottom.” The Apple tax windfall refers to the billions of euros Ireland was ordered to recoup from Apple due to alleged illegal state aid. Barrett’s analogy underscores the concern that the fuel excise cut, while seemingly universal, effectively functions as a subsidy for those who are already better positioned to absorb increased costs.
The ESRI’s analysis comes as governments across Europe grapple with how best to mitigate the impact of high energy prices on households and businesses. Many have opted for broad-based measures, such as tax cuts or price caps, while others have focused on targeted support for vulnerable groups. The Irish government has implemented a range of measures, including the excise duty reduction and targeted social welfare payments, to address the cost-of-living crisis. However, the ESRI’s findings suggest a re-evaluation of the effectiveness and equity of these policies may be warranted.
Inflationary Pressures and Geopolitical Risks
Beyond the distributional effects of the fuel excise cut, the ESRI report paints a cautious picture of the Irish economy. The think tank now forecasts headline inflation of 3.2% for 2024, up from a previous projection of 2.1%. This revision reflects the growing impact of higher energy prices, driven by ongoing tensions in the Middle East, particularly concerning the situation in the Strait of Hormuz, a critical waterway for global oil shipments. Prolonged disruptions to shipping through the Strait could significantly exacerbate inflationary pressures, impacting a wide range of goods and services.
The ESRI warns that a prolonged conflict in the region could “weigh on economic activity through investment and consumption channels.” Even a relatively short-lived escalation in tensions is expected to have a lasting impact on prices. The report highlights the vulnerability of the Irish economy to external shocks, particularly those related to energy markets.
Economic Growth and Housing Concerns
Despite these challenges, the ESRI expects the Irish economy to continue to grow in 2026 and 2027, albeit at a slower pace. The domestic economy is forecast to grow by 2.1% this year and 2.8% in 2027, supported by a strong labour market and increased household spending. However, the report similarly identifies significant risks to this outlook, including the potential for further escalation in the Middle East and the ongoing housing crisis.
Housing output remains a key concern for policymakers. While new dwelling completions rose to over 36,000 last year, the ESRI notes that forward indicators, such as commencements and planning permissions, suggest that further significant increases are unlikely. The institute now expects housing output to remain in the mid-30,000s in both 2026 and 2027, falling short of the government’s targets of approaching 50,000 units annually. The ESRI also warns that a spike in energy prices could further fuel construction inflation, posing an additional risk to housing supply.
The ESRI’s latest bulletin also raises concerns about the economy’s capacity to deliver on numerous infrastructure projects within a limited timeframe, emphasizing the need for prioritization. This concern is amplified by the potential for construction inflation stemming from the ongoing geopolitical crisis.
The ESRI plans to review its economic forecasts in light of developments in the Iran crisis. The situation remains fluid, and the potential for further escalation poses a significant risk to the Irish economy. The next quarterly economic commentary from the ESRI, scheduled for release in the autumn, will provide an updated assessment of the economic outlook.
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