There is a certain through-the-looking-glass quality to Ireland’s public finances. The country’s projected €8.6bn budget surplus this year, built on the back of laissez-faire tax policies and a cosy relationship with certain multinational corporations, has been the subject of endless gossip and no little envy for a number of years.
But because of where most of that money comes from – giant organisations happy to take advantage of Ireland’s low corporation tax rates to save even more billions compared to what they’d pay if they were headquartered elsewhere – there’s long been a sense of disconnect between what the state has in its coffers, and the state of the ‘real’ economy experienced by residents and businesses out there in the real world.
It sounds like a nice problem to have. Money is money after all. But as Budget time ticks around again, and the debates over what to do with all that money intensify, the government is being reminded that a nice problem to have is still a problem.
Spend or Save?
There are those, many respected global economists among them, who are urging the Department of Finance to spend, spend, spend, particularly on infrastructure projects. A surplus that size might represent a once-in-a-generation opportunity to make long-term investments in the country without cranking up the national debt, which is what infrastructure investments usually mean.
But the fact that there are no guarantees these mammoth multinational tax receipts will keep rolling in is pushing the government to err on the side of caution. After all, Ireland has joined the OECD scheme to set an international base line for corporation tax, raising its main rate for large corporations from 12.5% to 15% in the process. And anyway, building your economic foundations on the fluctuating profits of a handful of multinationals certainly requires you to embrace volatility.
Ireland’s GDP has fallen by 4.4% so far this year, usually enough to send economists scrambling to press the panic button. But Finance Minister Jack Chambers was able to shrug it off earlier this month, pointing out that the “outsized” influence of multinationals means that the ups and downs of Ireland’s GDP doesn’t really reflect “the domestic living standards of residents”.
Still, having already almost halved its surplus forecast for the period 2024-27 – it’s banking on receiving just the €38bn in that period now – the Department of Finance is sticking by its guns and insisting on effectively stashing the money away for a rainy day. Up to €100bn will be invested in a new sovereign wealth fund to cover future pension, climate and infrastructure costs.
Sticking to the Fiscal Rules
Yet for all that apparent caution and prudence – and this is where the economics of it all really start to look weird to the uninitiated – the government is still being accused by none other than its own fiscal oversight body of threatening to ‘overheat’ the economy through overspending, potentially driving up costs for residents and thus threatening the current strength of the entire economy.
In its Pre-Budget 2025 Statement, the Irish Fiscal Advisory Council argues that the temptation to increase public spending while cutting taxes on the back of having so much spare cash in reserve has proven too strong to resist, leading to the government breaching its own spending rules set in 2022 by some €12 billion. Even accounting for high inflation that followed the setting of those rules, the breach would still be €3 billion.
But why does that matter? Surely that overspend is more than compensated for by the budget surplus? Why not spend it on services and lower taxes?
The problem is, and why governments set themselves fiscal rules, is that government spending creates inflationary pressures of its own. Calculations from the Central Bank suggest that government overspending since 2023 has added 1.9% to consumer prices since 2022 – or the equivalent of €1000 per household per year.
Such is the topsy turvy world of fiscal policy. The whole of Ireland will no doubt be looking for increases in current and capital spending plus tax cuts from Budget 2025, pointing to this year’s cool €8.6 billion to justify their expectations for such a bonanza. And politically, it’s highly likely the government will give the people what they want. But in doing so, they could well be throwing fuel on the fire of cost of living pressures which, should the economy hit the skids and employment fall in the near future, could come back to bite the country hard.
