Budget 2016 looms but the political world is in a funk of expectation over the general election. That the two are inextricably linked is clear. The election will be fought on economic grounds primarily.

Hurly-burly and strident rhetoric are inevitable once the campaign proper begins. Ahead of all the razzmatazz, however, what is needed more than anything is proportionate discussion on the economic challenges facing the State.

Recovery is underway in earnest, of that there is no doubt. Many more people are at work than when the crisis was at its worst. But it is as well to recognise that the public finances remain constrained. Huge debts assumed to fund large budget deficits and rescue the banks must be repaid. This is the backdrop against which all fiscal promises must be assessed during the election.

Raising taxes

We are in the realm here of core truths. At issue is the tax-raising capacity of the Exchequer and the obligations it must meet and which it chooses to meet. These are closely linked to economic activity within and outside the State. Such factors will frame every single budgetary decision taken by the next government, no matter who forms it. So they are critical for the election debate.

A comparison instructs. Last year the advancing economy returned to the size it reached in 2007 before crisis struck, precipitating drastic decline in tax revenue as banks went into meltdown. In 2007 the State collected €47 billion in tax and paid €2 billion to service the national debt. In 2014, however, the tax haul was €41 billion and the debt service cost was €8.2 billion. Thus did the crash see debt obligations multiply off lower tax returns.

This is crucial, although tax revenues are well up in the current year and debt service costs are down a good deal.

The tax haul is now on course to comfortably exceed €44 billion by year end. Debt service costs this year, following the refinancing of expensive International Monetary Fund debt, might drop to €6.7 billion.

That remains an onerous burden, although a successful flotation next year of the nationalised Allied Irish Banks would facilitate further debt repayments and relieve some of the strain.

When State bank shares and other assets are taken into account the net debt position is a lot better than the headline debt rate, now on course to drop below 100 per cent of GDP by the end of this year. But such debts are still high and the State is a big beneficiary right now of low borrowing costs on the open market.

The European Cental Bank is likely to continue its quantitative easing campaign next year so there would appear to be no imminent threat of interest rates rising substantially. Interest rates are at a historic low, however, so they will rise eventually.

In summary, Ireland remains vulnerable to any shock in bond markets. Given the State’s reliance on such markets, the election campaign will be closely followed in the investment world for any sign of deviation from the current fiscal course. All of this comes amid rapid economic growth and a big drop in unemployment, now 9.4 per cent from just under 11 per cent a year ago and more than 15 per cent at the peak. It is clear, however, that the public finances are still quite tight.

True, the budget deficit is declining rapidly as a proportion of economic output. Yet the Government is still borrowing this year to finance spending and it will borrow again next year.

Caution

Moreover, the Exchequer is more heavily reliant these days on income tax receipts than previously. This imposes its own limitations, although universal social charge cuts will be centrepiece of the budget next Tuesday and further cuts to come will be signalled. Take note, however, that fiscal projections underpinning the 2016 plan assume another 47,000 jobs will be created on top of some 53,000 new jobs this year.

The Irish economy has taken huge strides forward. As the election nears, however, any excessive campaign promises should be treated with due caution. Conditions in the outside world have been particularly benign and activity in the domestic economy has picked up strongly. Still, warnings from the IMF that the world could slip into another financial crisis demonstrate that ructions in China could ripple out.

With Ireland’s body politic in an economic sweet spot, that seems salutary.