Israel’s attack on Iran, including cities in the Islamic Republic as well as military targets, has elicited an Iranian response in kind which causes a special kind of alarm.

It pits a nuclear power against an antagonist seeking to join the nuclear club, but as yet unable to go beyond conventional weapons. The most recent comparable scare is the continuing conflict between India and Pakistan over Kashmir.

While escalation between these two nuclear powers has been avoided, the consequences of proliferation in the availability of atomic weapons are stark.

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Development of nuclear weapons and delivery capability by Iran would bring the total of sovereign powers, each capable of initiating a nuclear exchange, to 10.

The current nine are the USA, the only country to have actually used a nuclear weapon back in 1945, along with the Russian Federation, France, the United Kingdom, China, India, Pakistan, North Korea and Israel.

The efforts to avoid nuclear conflict, designed to avert proliferation and minimise the risk of Armageddon, ironically had their greatest success during the Cold War and its aftermath, when the doctrine of mutually assured destruction prevailed, despite the huge build-up in numbers of weapons on both sides.

Stockpiles

The great powers even succeeded in persuading the newly independent former constituents of the Soviet Union, including Ukraine, to surrender their stockpiles to Russia, the successor state.

Proliferation has accelerated in recent decades with the build-up in China and the extraordinary acquisition of nuclear capability by the dictatorship in North Korea, whose national output is estimated to be smaller than that of Luxembourg.

Pakistan and India, neighbouring nuclear powers, are in continuing conflict over Kashmir, but the Iran/Israel conflict has the greatest potential to reap the whirlwind of proliferation.

Dissuading Iran from further nuclear development is an Israeli objective.

It remains improbable that nuclear weapons will ever be launched by any of the nine countries now capable of a first strike, but less improbable than it used to be

Thus the shadow cast over the outlook for the world economy has broadened, not because a nuclear exchange has suddenly become likely, but because the risk has risen, from virtually zero to some bigger if still very small, number as more sovereign states acquire the capacity to gamble on a first strike.

That very small number magnifies the reality that actual and potential conflicts, even if confined to conventional weapons, are more numerous.

World stock and bond markets have already weakened in response to the Israeli attacks and the Iranian response, adding to the nervousness induced in April by Donald Trump’s tariff wars and the return of American isolationism.

It remains improbable that nuclear weapons will ever be launched by any of the nine countries now capable of a first strike, but less improbable than it used to be.

As with all great developments in geopolitics, small countries are spectators, but they can do better than hope for the best in their conduct of domestic economic policy where they are sovereign. There are two great uncertainties for Ireland which should influence the preparation of the 2026 budget, the current preoccupation of ministers.

The budget surplus of recent years has provided the escape hatch for politicians keen to spend, while they acknowledge that US action to tax their multinationals at home could see their apparent financial headroom evaporate very quickly.

Downturn

An international downturn, induced by tariff wars and armed conflict, would depress activity and hence Government revenue, even if the US does not act on corporation tax as US commerce secretary Howard Lutnick has threatened.

Both could happen together.

In the circumstances, the procession of tax give-aways and expenditure over-shoots needs to be curtailed, in the interest of ensuring that priority public services will be sustainable even if the economic prospects worsen. Readers will recall the sheer speed of the budget meltdown following the banking collapse in the autumn of 2008.

Ministers, departments and State agencies are bargaining about the extent, not the principle, of continuing with budget generosity. Some of the more outlandish proposals from November’s election manifestos have been forgotten – tax relief on gym club membership fees is an example – but there is a widespread perception that the improved public finances of recent years are somehow permanent and that there is money rotting away in the basement of the Department of Finance.

One-offs extended

Tax reliefs and spending schemes introduced as temporary one-offs are being extended, there is rumoured to be yet another arbitrary VAT rate for restaurants, down from the discounted rate of 13.5% to a super-discount at 9%, while regional lobbies are vocal.

The North West Regional Assembly wants €9bn, the mayor of Limerick €5bn.

If the budget surplus is transient as the Fiscal Council insists, the risk is a repeat of the sharp fiscal adjustment which decimated the capital programme after the last fiscal crisis emerged so suddenly in 2008.

Protecting against the negative external environment requires an early end to complacency about the budget options.