Nervousness about corporation tax revenues has inspired the Central Bank and the Fiscal Advisory Council to caution against a giveaway budget in October. They fear that as much as half the revenue bonanza could disappear at some stage over the next few years. A quarter of total revenue comes from this source, and half of that is paid by just three big multinationals. It is unusual for a developed country to gather more than 10% of total revenue from taxes on corporate profits and unwise, according to both bodies, to base long-term policy on the assumption that Ireland’s good fortune will continue.

Officials in the Departments of Finance and Public Expenditure do not need long memories to recall the last time a similar dilemma arose.

Loose budgets in the bubble period up to 2008 were made to look prudent by booming revenues from stamp duty and ministers were able to proclaim prudence on delivery. But the booming stamp duty revenue promptly evaporated when the property bubble burst. Add in the cost of propping up the bust banks and the public finances collapsed. The Government was unable to finance itself – nobody would buy Government bonds and the State was forced into an IMF bailout in the autumn of 2010. Public recollection of these events blames the mismanaged banks but the careless budget policy from 2000 until 2007 played a role too.

The post-bubble budget adjustment did not consist solely of across-the-board cuts to current Government expenditure.

There were also tax increases and there was a particularly savage assault on the public capital programme, a persistent feature of budget tightening episodes in Ireland down the decades. This is a hidden cost of budgetary mismanagement.

The political soft option, if policy has to be tightened, is to dodge cutbacks to current spending and to focus on the capital side. It can always be asserted that the projects are not being scrapped, they are merely delayed and will be delivered eventually.

The result is a deeply pro-cyclical pattern to the public capital programme and an environment which makes long-term planning difficult for construction and civil engineering firms.

Government spending on capital formation reached just short of €10bn in 2022, regaining finally the level recorded in the previous highest year of 2008. But in between, the figure had fallen to only €3.6bn in 2012, when the economy had contracted sharply and the unemployment rate had soared to 15%. Today’s unemployment rate is just under 4%.

Policy

Policy has been in direct conflict with the standard textbook recommendation on how to run the budget. Spending on capital projects should be a stabilising factor and should be kept steady through the economic cycle. This is particularly important in a small trading economy like Ireland, where there are many sources of volatility over which there can be no domestic control.

So one of the motivations of a prudent approach in today’s circumstances should be the maintenance of the State’s ability to borrow in adversity whenever it strikes, thus avoiding the feast-or-a-famine pattern so evident in the historical record of the Irish capital programme. Popular budgets, likely anyway to be decried for insufficient generosity by the opposition, increase the risk of deflating the capital programme at a future date when the macroeconomic position is already weak.

It is important also that each component of the capital programme is chosen with care.

Lobby groups of all varieties are vocal these last few months in volunteering to spend the corporation tax bonanza and the Government has published plans to raise capital spending substantially.

Some questionable projects have emerged, notably a demand for €863m the Football Association of Ireland which is proposing use part of this sum to build new stadiums for every single team (there are 20) in the League of Ireland, one for everybody in the audience as on The Late Late Show.

None of this cash will come from the FAI, which has crippling debts despite an emergency bung from the Government and a generous debt deal from the Bank of Ireland.

It wants 60% of the total from central Government, 20% from local authorities which means central funds again, and the final 20% from unidentified private benefactors.

A far bigger scheme, the Metro Link costing €9.5bn for a single tram line from Dublin city centre to the airport and the suburb of Swords, has been sent to An Bord Pleanála for which a thin cost benefit analysis was carried out by TII in 2018 and it’s debatable if it complies fully with the spirit of the Public Spending Code – a code that the government pretends to adhere to. An extraordinary €300m has already been spent on planning Metro Link and its various earlier versions since 2007.

Preserving a stable and effective capital programme is not served by giveaway budgets, or by ignoring the Public Spending Code.