It is clear from ministerial hints and media briefings that the 2026 budget, due in October, is undergoing a re-think.

Important pre-budget documents including a revised National Planning Framework are due for release over the next few weeks and the Department of Finance will publish its projections of revenue, spending and borrowing for later years, an EU requirement.

The economic outlook is less rosy than it appeared when the general election was held six months ago.

ADVERTISEMENT

An economic slowdown in trading partners or a collapse in tax revenues would alter, and perhaps very quickly, the ability of the Irish Government to support economic activity.

Both could happen together – all EU members are exposed to the US government’s gyrations on tariffs, while Ireland has an extra exposure to unilateral changes in US tax law which would see the boom in corporation tax revenues evaporate.

Since Ireland is part of the eurozone there is no resort to exchange rate changes and no options in monetary policy either.

Ireland has no currency and no control over interest rates, set by the European Central Bank in Frankfurt.

Budget policy is the only policy instrument available when the economy weakens and a prudent government, faced with uncertainty about the macroeconomic prospects, needs to preserve its freedom of action should things go wrong.

Things sometimes go wrong in pairs – there could be a tariff war with the US alongside an assault on the tax bonanza from multinationals.

In the years leading up to the crash of 2008 the banking system, overseen by a complacent Central Bank, was financing a property bubble, which generated bumper revenues from stamp duty.

The budget was even in surplus on occasion and sovereign debt was lower, relative to the tax base, than in most eurozone members.

Then two disasters struck – the banks went bust, triggering a monster rescue by the State, whose regular finances went into heavy deficit anyway as the transient tax revenues collapsed.

Despite efforts to cut spending and broaden the tax base, it was too late and Ireland faced an IMF programme for the first time in its history by the summer of 2010. Nobody else would lend to the government.

The speed of the decline, from sunny optimism to the insolvency of the State, took less than two years.

There had been plentiful warnings about excessive credit growth and the need for caution on government finances in the years leading up to the crash, waved away by the government of the day. A former Central Bank supervisor, Willie Slattery, broke ranks to warn about excessive credit expansion as early as 2000 and was followed in subsequent years by a stream of worried commentary from economists about the risks to the banking system.

There has been no comparable dismissal of the frequent recent warnings from the Fiscal Council and others.

There is now a much-improved system of bank supervision and the next crisis, whenever it comes, is not likely to arise from careless lending by the much reduced number of banks that have survived.

The most likely source is the rapid disappearance of the budget surplus, consequent on US action to keep tax receipts from American multinationals at home.

Should US action on corporate tax coincide with an international slowdown, the ingredients are to hand for another fiscal crisis. On previous occasions when a big fiscal gap emerged in Ireland, unwillingness to take early action made the eventual adjustment more painful. In the years following the IMF programme, there was a severe squeeze on capital spending, the source of today’s infrastructure backlogs.

Spending on State projects has recovered and the Government is publicly committed to further extending the capital programme in the years ahead.

But its capacity to do so depends ultimately on sustainable public finances, and the combination of a growing capital spend with tax giveaways and loose current spending will not be possible.

Departments have already been asked to restrain their demands on the 2026 budget and the supposedly temporary household income supports introduced by the previous government are also in the firing line.

In order to protect the capacity to address the most pressing infrastructure gaps, it may be necessary to drop less urgent spending plans, including the biggest single capital project ever contemplated here, the underground rail link to Dublin Airport, due to cost €15bn or €16bn.

When you cannot have it all, a distinction needs to be drawn between the “must have” and the “nice to have” capital schemes. Housing and water supplies before underground railways?