The Department of Finance had an impossible job in trying to forecast what will happen to the economy and the public finances this year. The situation in the Middle East remains unpredictable and volatile. It was wise, in this context, to sketch out the possible impact of a range of scenarios, but equally it is necessary to realise that what actually happens may fall outside any of these.
There is some positive news in the forecasts about the state of the economy moving into this year, which was stronger than anticipated. For a variety of reasons, the forecast budget surplus for 2026 has been revised significantly upwards to €9.2 billion.
This is a stronger exchequer position than almost anywhere else in the EU and gives the Government some firepower to respond if the economic situation worsens significantly. But it will also add to political pressure to spend more across the board.
The Minister for Finance, Simon Harris, correctly says that the Government needs to “keep its powder dry” in case the situation worsens. But he is also flagging budget tax cuts and refusing to rule out the return of household energy credits, if the crisis worsens. Pressure – and budget expectations – will now build in the months ahead. Keeping a lid on this will be no easy task.
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Similar challenges face Minister for Public Expenditure Jack Chambers in keeping spending in check. Already an overspend in education and the two energy support packages have led to the budget spending ceiling for this year being raised. Chambers promises that in future departments across the board will have to find savings in a new “levy” system to pay for overruns. Whether he can enforce this kind of discipline remains to be seen.
In the meantime, spending in 2026 will overrun target and the Government will bank on a further increase in corporation tax to help pay for this. As has been the case in every recent year, Ireland’s exposure to this potentially volatile source of funding will edge a bit higher. Money is fortunately being set aside in two funds to help support investment if the exchequer hits any difficulty. But this will only bridge a temporary hiatus rather than any fundamental change in trends.
The correct way to manage the public finances is to spend a bit more or tax a bit less if the economy weakens. And to try to improve the efficiency of spending and the sustainability of the tax base. The concern is that rather than focusing on this, the Government now gets caught up in a series of fights for resources, following on from the package announced after the fuel protests.
A higher surplus is good news; but it also means more pressure to carry on spending at a rate which is only supported by unpredictable revenues.
