Most people fear a another bout of austerity is coming

MOST people expect austerity measures to be introduced by the next government, despite promises of no income tax rises.

A question asked as part of the latest Consumer Confidence Index shows that 86pc of people anticipate a new round of tax hikes and charges, along with spending cuts, to be put in place.

The KBC Bank confidence index is up a bit in May due to the easing of the lockdown but is still near record lows.

The threat of a return to austerity could damage the economy, KBC Bank economist Austin Hughes said.

This is because fears of more public spending cuts, tax rises and new charges being introduced could prompt consumers to restrict their spending, a move that would further slow down the recovery of the economy.

This would particularly hold back the recovery in consumption-related employment.

Mr Hughes said this could translate into what he called an economic second wave.

This would leave the Irish economy “on a weaker recovery trajectory than would otherwise be seen and result in a permanently lower path for employment”.

Many households have still to recover from the repeated bouts of austerity introduced after the banking-induced economic collapse more than a decade ago.

This has left them scarred. A string of Budgets from 2008 introduced a string of austerity measures. Among these were the USC, cuts to respite grants, reductions in child benefit payments, public sector pay reductions, a pensions levy, and property tax.

Demonstrating that the impact of the last economic crisis is still with us, a recent survey found just one in eight households has the financial firepower to weather an economic emergency like this.

The coronavirus has left middle-aged people with children bearing much of the brunt of virus income shock. But young people and those who rent are also being hit very hard.

Latest figures show that, due to the pandemic, more than 1.26 million workers are now relying on the State for all or part of their income.

The State is expected to have to borrow €30bn to deal with the fall-out from Covid-19.

Taoiseach Leo Varadkar said last month he was strongly opposed to income tax increases or welfare cuts as measures to pay for the enormous cost of fighting the virus.

But this month he has left the door open for tax hikes as talks continue with the Greens and Fianna Fáil to form a new government. This is despite the Irish Fiscal Advisory Council saying a return to austerity can be avoided.

The public is not convinced they will escape a new bout of austerity.

Most people expect some form of tax cutting and public spending cuts to result from this, the KBC research shows.

Mr Hughes said: “The overwhelming view held by 86pc of Irish consumers is that some element of austerity measures will be implemented in the coming years, with more than half of this group taking the view that such measures are very likely.”

Eight out of 10 consumers expect the economy to waken in the following 12 months.

If there is more austerity, which prompts consumers to hoard cash instead of spending, it could lead to a new scarring effect, Mr Hughes said.

“It would seem particularly unfortunate if the Irish public and policymakers, scarred by the global financial crisis, acted in a manner that materially increased the risk of much greater scarring in the future through a legacy of much lower activity and employment than could otherwise be the case.”

The consumer sentiment index also reveals that most households have experienced a big hit to incomes from the virus.

Just 3pc of consumers feel they are better off than 12 months ago, while 39pc feel they are worse off.

Some four out of 10 households expect a further deterioration in their living standards.

This reading for May is a slight improvement on the April result, when half of households expected a further dip in their incomes.

The overall KBC consumer index rose to 52.3 in May.

The 9.7 point monthly increase in May is the largest month-on-month improvement since January 2015.

But it comes after the index hit its lowest level of 34.7 since it was first calculated 24 years ago.