Last week’s budget in the UK was far more restrained than the Irish version three weeks earlier. The Republic enjoys a budget surplus; diminishing, to be sure, but enough to allay worries about higher interest rates on sovereign debt.
As long as there are no further additions to debt, there need be no concern that the annual interest bill might run away quickly, threatening the sustainability of the public finances.
The UK chancellor is not so lucky and produced a steady-as-she-goes budget with small giveaways on personal taxes and income supports, partly balanced by some tax-gathering from the usual suspects. The suspect list included the banks, yet to be forgiven for the bailouts required when so many courted bankruptcy through lax management just two decades ago. Commentators even labelled his budget ‘boring’, which will have pleased the treasury officials. With interest rates on the sizeable UK government debt rising briskly, they will wish to keep the bond markets bored.
The alternative for the UK government, now led by Andy Burnham, was to do what his predecessor, Keir Starmer, must have considered in 2024 when Labour entered a guaranteed five-year spell at the helm with a huge parliamentary majority.
The formula he rejected was to raise taxes and cut spending by large amounts, and quickly, with time enough to recover before an election he could defer to 2029.
Riskier course
Starmer took a riskier course and lost office, bequeathing to Burnham a higher outstanding debt, a stubborn budget deficit, nervous bond markets and a shorter interval to the next election. The UK is currently paying 5.3% on 10-year government borrowing and remains on probation in the eyes of the bond market after the kick-to-touch budget.
The Dublin Government, in contrast, distributed budget goodies in all directions on the basis that the economic outlook is benign and will remain so. Subsequent opinion polls indicate that an ungrateful electorate has failed to respond. The governing parties have slipped, and the findings suggest that the greater give-aways favoured by Sinn Féin and other opposition parties were closer to the electorate’s assessment of what they deserved. There was, at minimum, a failure by Simon Harris and his colleagues to manage expectations. In the UK, the national narrative has been so gloomy in recent years that a low-key budget did not disappoint.
Caution
The case for greater caution in the Republic is based on the looming costs of health and social care for an ageing population, stressed by the Fiscal Council and the ESRI, but also on fears that the short-term outlook could worsen suddenly. Long memories are not needed to recall how quickly the tax bonanza from stamp duty evaporated as the banking crash materialised in 2007 and 2008.
The aging problem is baked in but is not imminent, while tax bonanzas can disappear very quickly. An international downturn is always possible, could arise inside the next year or two and would have a disproportionate impact in a very small, very open economy. A recent report from the economics team at AIB looks reassuring; they feel the outlook for the Republic, at least over the next couple of years, is favourable. Earnings growth will outstrip consumer price inflation out to 2028, as it has done on the published figures in recent years. Even the bump in prices during 2026 is below average earnings growth according to AIB. Opposition parties in Dáil Éireann have, nonetheless, persuaded people that there is an ongoing cost of living crisis.
Indeed, the mainstream media, including RTÉ, routinely refer to this crisis, as if the ex cathedra use of the definite article renders their chosen description incontestable. The case for caution, given Ireland’s well-established exposure to macroeconomic volatility, does not require that economists or anyone else be confidently able to predict trouble ahead.
Gathering uncertainties
The best they can do is note the gathering uncertainties. Those who foresaw a ‘soft landing’ in the years leading up to the crash in 2008 were not unreasonably optimistic: there were others who disagreed, but the banks had concealed the extent of their losses, or were unaware of them. The optimists were wrong but not culpably blind. Another bank failure is unlikely but an international slowdown is again a possibility.
This is the case for caution, preserving future fiscal capacity when a giveaway budget or two would be timely. The late Tom Garvin, professor of politics at UCD, used to argue that a failure in Irish politics has long been an unwillingness to engage in “the political education of the general public”. He would have seen the budget introduced on 6 October in the absence of any expectation management as confirmation that the pattern survives.
