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In simplistic terms, inflation is a word for an increase in prices. In practical terms, it means you can afford to buy less. It means our current wages, and any savings we might have, are worth less. According to the Office for National Statistics, the UK’s Consumer Prices Index including owner occupiers’ housing costs rose by 5.4% in the 12 months to January 2022. This is a stark statistic for low-income households previously struggling to afford the basics, as in a period of high inflation, these necessities will cost more. For people living on a fixed or low income, while costs continue to soar, it’s harder for them to just survive. The pandemic has resulted in a new playing field. The economy has bounced back quickly, outstripping expectations, and driven an upsurge in demand. The UK economy grew 7.5% in 2021, an annual rate not seen since the 1940s. On the other side, production has been slower to recover. Consumers are demanding more when there is less available, and in a world where demand outstrips supply, prices will inevitably rise. Too much demand chasing too little supply leads to inflation. One major reason production has been slow to recover is down to supply chain issues, which are, in many cases, global and difficult to solve. Northern Ireland is experiencing more than its fair share as Brexit adds additional complexity to the supply chain. The House of Commons Committee of Public Accounts released a paper this week confirming that the new border arrangements have added costs to business and they “remain concerned” about the impact of trading arrangements changes. Shortages of labour are being experienced across many sectors right now. The shortage of lorry drivers has been well highlighted, given the number of European drivers working in the UK dropped by over a third in the year ending March 2021 according to official figures. This drop is pushing up the salaries for available drivers, with the Road Haulage Association reporting an 18 percent increase in driver employment costs in a survey conducted in October 2021. Energy prices can also be a major cost driver. In recent months, the UK has seen a sharp rise in the price of oil and gas, in part due to the ongoing situation in Russia and Ukraine. These are driving the costs of goods even further. A US based CFO survey found that 80 percent of firms are passing all these cost increases to customers through higher prices and we are all feeling the impact of this. Unfortunately, people’s beliefs and behaviours are part of the problem. There is a school of thought called inflation expectation which goes on the premise that if we think we are entering a prolonged state of high inflation, the chances are we will and we will make decisions on that basis. Employees will demand wage increases to cover the higher cost of goods and services. Consumers will scramble to buy before costs go up further. These actions will result in further pressure the demand side, which will push costs up even more. It’s not just Northern Ireland and the wider UK that is going through this right now, the US inflation rate of 7.5% is at its highest for 40 years. History teaches us that once inflation takes hold, it’s hard to get out of it and there is no quick fix. One tool that might help combat inflation is to increase interest rates. In the US in the 1980s, measures that successfully brought inflation down involved bans on wage increases and record high interest rates. High interest rates meant borrowing money was expensive and the resulting increase in mortgage rates meant that people had less money, which reduced overall demand in the economy. This triggered a recession in 1981, which caused even more hardship for those trying to make ends meet. Certainly not a good outcome, even if it did sort inflation out. Some economists believe the current bottlenecks will eventually resolve, prices will subside, and inflation will return to a low rate without a need for significant change in monetary policy. In other words, this is a temporary period of high inflation driven by the pandemic’s impact on the supply chain issues, giving hope to some that the current strains will be short-term. High inflation could, in part, be a result of inflation expectation, and therefore that answer may in fact be to remain calm. However, with no control over the evolving situation in Russia and Ukraine, which is driving the price of oil and gas to near record highs, it is a little more difficult to remain calm. Zara Duffy Head of Chartered Accountants Northern Ireland. First published in The Irish News on 15 March 2022.

Originally posted on Business Post 06 February 2022. There is no evidence to support the status quo, so why are politicians still waiting to make a decision? The clearest signal yet that Irish politics has moved on from the emergency phase of the pandemic came from the Oireachtas Committee on social protection last Wednesday. In its comments on recommended increases to the state retirement age by the recent Commission on Pensions, the committee essentially contradicted the findings of that very commission. The committee said that the qualifying age for the state pension should remain at 66, with additional flexibility for long serving employees. This jars because Ireland has become accustomed to following the recommendations of experts. Guidance from public health experts has largely shaped our response to the pandemic for the best part of two years. By and large, the technocracy of public health has dictated the political decisions made since the pandemic began, perhaps to an excessive degree according to some. Nevertheless, when compared to other countries, and this is in no way to diminish the terrible loss and sadness of the pandemic, Ireland has fared reasonably well. Success came from sticking to the advice from the scientists, and this may also help explain why the harsh restrictions and measures were more acceptable to the majority of the public. We have a tradition in this country that respects knowledge, and few enough Irish people suffer from a Michael Gove-style fatigue from having to listen to experts. Whatever else can be said about the pensions commission, it did not lack for expertise, having experienced business people, public servants and academics on board. It is almost unimaginable that a recommendation from the National Public Health Emergency Team (Nphet) to the Minister for Health could have been, at any stage over the past two years, referred back to an Oireachtas committee to be contradicted. So, what has happened here? Are medical doctors in some way more expert than economists and welfare analysts? Is the political system simply trying to reassert its sovereignty? Or is the pensions issue simply less critical or urgent than the pandemic crisis, leaving expert opinion on the issue fair game for challenge? Considerations of political primacy and the perceived severity of voter pushback may have informed the committee’s report. Nevertheless, shouldn’t our politicians be more amenable to guidance from expert groups established to provide advice to the state? Politicians must of course represent the views of their constituents, if only to preserve their seats. They may not always read these views accurately or be swayed either by a vocal minority of their own support or an opportunistic opposition challenge. The Oireachtas committee came up with 13 recommendations on the pensions issue. Not one offers any concrete solution to the fundamental problem of retirement age – namely that we cannot afford the status quo. Their recommendation instead is to wait for the advice of the current Commission on Taxation and Social Welfare to give the funding answer. The Commission on Taxation and Social Welfare is another expert group. Will its report fall foul of yet another Oireachtas committee, which will recommend waiting for . . . what? In a post-pandemic era, voters may well be less tolerant of poorly informed policies. It will be interesting to see what they think of Norma Foley the Education Minister’s determination to run this year’s Leaving Certificate in the traditional format. Political noise from the opposition was inevitable. This time, however, many voters may conclude that the decision based on expert advice to go with written exams was the correct one. In the outcome of the Portuguese general elections this week, it seems that voters recognised, and then rejected, the ill-advised manoeuvres of the smaller parties supporting the previous Portuguese coalition. Those parties had not supported the fiscally prudent budget being promoted by the larger Socialist Party within the coalition, and this triggered the election. Now prime minister Antonio Costa, leader of the Socialist Party, will have an overall majority. One interpretation of this outcome is that when push came to shove, the Portuguese electorate recognised what needed to be done to govern their country well. Over the course of the pandemic, both the 2020 caretaker government and the current coalition had the good sense not to treat the population as fools. People realised that restrictions were necessary, and then got on with it. Wobbles in adherence to the pandemic restrictions only happened when government advice was conflicting or unclear, as was the case with the approach to schools reopening towards the back end of last year. Our government needs to continue the good habits of implementing policy based on expert evidence. The report of the Oireachtas Committee on social welfare flies in the face of this. If the results of the Portuguese election are anything to go by, politicians will bear the cost of getting it wrong.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 09 January 2022. Emmanuel Macron aims to have the 15 per cent corporate tax proposals in force by this time next year, and that’s not the half of it. The publication in the days before Christmas of a proposed EU directive to give effect to a 15 per cent rate of corporation tax across the bloc had a particular Irish hue to it – Paschal Donohoe’s sticking point of a “minimum tax rate means 15 per cent and not ‘at least’ 15 per cent” is in the text. If this Irish imprint came at the expense of surrendering a totem of our economic policy, the 12.5 per cent corporation tax rate, it also came at the expense of an EU totem that all companies must be taxed the same way. It was Brussels’ adherence to that principle, and its consequences for the EU state aid rules, that gave rise to the €13 billion Apple tax case which is still grinding its way through the European legal process. In future bigger companies will pay at different rates to their smaller counterparts. It will be up to the French presidency of the EU Council to push this draft corporation tax directive through the European political system during the next six months of its tenure. The effectiveness of an EU Council presidency is a factor of the size of the country which holds it. Put simply, the bigger the country, the more civil servants it has to throw at its pet European projects and thus the greater the likelihood of success. As the second largest economy in the EU, France has plenty of resources to direct during its six-month tenure in the hot-seat. There is no lack of ambition in the 76-page programme for the French presidency of the EU. It is not surprising that the programme commits to taking forward work on the 15 per cent proposals and aims to have them brought into force by this time next year. The French have long been suspicious of any country which, like Ireland, used low tax rates as part of their foreign direct investment offering. Ironically, the last time France held the presidency in 2008, there was some back-pedalling on EU tax reform because Irish voters had just rejected the Lisbon treaty. What is surprising, though, is that the promotion of the 15 per cent regime across the EU seems not to be the priority of the French economic and financial affairs agenda. Instead, the key project is the promotion of a “carbon border adjustment mechanism”. A carbon border adjustment mechanism is of course a tax by another name. The idea is that by levying additional duties on carbon intensive products coming into the EU, EU-based businesses will be deterred from outsourcing emissions-heavy manufacturing beyond the EU borders to avoid emissions quotas. A carbon border adjustment mechanism is a solidly “green” idea, in so far as it would cost businesses rather than individuals and is likely to play well with voters – a prime concern in an election year in France. Perhaps, though, the key to understanding this French emphasis lies in where that new tax money might go. The institutions of the EU are part funded by what are known as “own resources”. Own resources come from the excise duties collected by all the member countries on dutiable goods coming into the EU. The EU also receives a share of Vat receipts. These sources make up only one-third of the EU budget, and the shortfall comes from direct contributions from the member countries. This shortfall is now becoming a major problem because the EU budget is mushrooming from providing grants and cheap debt to countries to tackle the pandemic and deliver on the green agenda. The problem with cheap money is that someone, somewhere must pay for it. Proceeds from the carbon border adjustment mechanism are to be treated as “own resources” and are to go directly towards the EU budget. The mechanism is estimated at bringing in some €10 billion a year, which is no small amount until compared with the EU’s €750 billion pandemic recovery fund. Nevertheless, the contribution reinforces the notion that the EU must get better at paying its own way. Own resources are the new EU totem. Though not explicitly mentioned in the French programme, there are EU plans to further expand these by staking a claim on part of the corporation tax paid by companies with a €20 billion turnover. The pandemic has brought bigger government both at national and EU level – 15 per cent and global corporation tax are last year’s debates, with just some Is and Ts to be dotted and crossed. Managing and funding a bigger EU machine seems to be the priority for this French presidency. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland