GOVERNMENT INTERVENTION IN THE RETAIL MARKET

Version of piece i wrote for Irish Examiner today. My tolerance for what I perceive as populism is wearing thin.

The past week in Ireland was dominated by two events from an economic perspective - the pressure from Government on retailers to cut grocery prices and the announcement of the creation of a sovereign wealth fund to deal with the projected budget surpluses over the coming years.

It is quite extraordinary to see Government intervene to put pressure on private retailers to cut consumer prices. It is a level of government intervention that is intense and smacks of an unpopular government that will try anything to curry favour with the voting public. It strikes me as blatant political populism, but given that the rest of the DáiI is at it, why shouldn’t everyone join in? The Labour Party is calling for a windfall tax on retailers. Interesting! I guess Covid-19 and the manner in which government responded has changed the ground rules in terms of government involvement in our lives. The rules have clearly changed forever.

In relation to the food issue, the available data do tell us something. The food supply chain is basically made up of three components – the primary producer or farmer; the manufacturer or processor in the middle; and the consumer-facing retailer. There may be wholesalers and distributors involved in the process, but basically there are three key components.

I am not sure what sort of margins the retail grocery multiples are earning, because such data is not made publicly available. We will in due course get some information on what the processors are doing, but there is a lot of information available on the primary producer.

The latest consumer price inflation data this week showed that food prices increased by 0.6 per cent in April and by 13.1 per cent over the past year. Between January 2021 and April 2023, average consumer food prices have increased by 18.4 per cent, with vegetable prices up by 13.2 per cent and milk prices up by 35.1 per cent. Over the same period, agricultural input prices have increased by 51.7 per cent, with energy costs up by 62 per cent; electricity costs up by 99.2 per cent; and fertiliser prices up by 181.6 per cent. These increases have much to do with global events, particularly the illegal and barbaric Russian invasion of Ukraine. It has been evident for the past 15 months that food price inflation would become a thing here, and indeed in most countries around the world. Ireland is not unique.

The reality is that food prices have increased for good reason over the past couple of years, following a couple of decades of price compression, due to cheap food imports and intense retail competition as the market share of the discounters has grown. Primary producers need to be considered, as witnessed by the demise of horticulture in Ireland over the past decade. This is a salutary tale.

The good news for consumers is that global energy and food commodity prices are falling, and this will likely result in lower food prices for consumers over the coming months. Government of course will take credit, but personally I would much prefer to see a lot more Government focus on the energy companies and less on the grocery multiples.

In other news, the Minister for Finance announced the setting up of a sovereign wealth fund, the details of which are not yet available as the legal structures must be set up. I am not sure why a second fund with its associated costs is being set up, as we already have a national reserve fund that the Government has put €6 billion into since last September.

Be that as it may, the fund will now be set up to deal with the expected Exchequer surpluses over the coming years. There are basically three things the Government could do with those surpluses – spend some of it on housing, health and the other serious challenges facing the country; buy back debt and reduce the €226 billion debt; or put the money into an investment fund.

In relation to spending more money on housing and health, this option does have appeal, but we need to make sure that the money is spent wisely and that the many obstacles to the delivery of housing and health are addressed before committing significantly more money. Proper management within the health service and a planning system that is not fit for purpose come to mind immediately.

In relation to paying down debt, the equation is not complicated, but there can be no certainty. Namely, if the fund could deliver higher returns than the average cost of debt servicing, then investing would make more sense and vice-versa. Since 2022, the NTMA has issued €11.75 billion in debt, with an average maturity of 16.3 years and an average cost of 1.92 per cent. As all the debt matures, it will be refinanced at higher rates, but I still believe that a properly manged fund could deliver higher returns. The legal structure of the fund will be important because we know what happened the last fund during the banking crisis.