Ireland’s long holiday from the fiscal realities familiar to the rest of the world may be about to end. Since the rapid recovery of the Irish economy from the financial crash, successive governments have enjoyed the benefits of rocketing corporation tax receipts, strong and sustained economic growth and a rapid rejuvenation of the public finances.
Governments have been in the fortunate position of being able to expand public spending substantially – growing the number of employees and services steadily – while at the same time running large budget surpluses. At the same time, they have been able to establish savings funds for future investment and as a buffer against future fiscal misfortunes. The last three budgets were each able to provide roughly €10 billion for additional spending on public services, reduced taxes, and a series of so-called “one-off” giveaways – and still return a large budget surplus.
This fortunate position is rarely the lot of governments anywhere, which are usually forced to choose between unpalatable alternatives, making difficult decisions between spending more and taxing less, between investment on one set of pressing priorities or on another. To govern, as they say, is to choose.
In the new world that US president Donald Trump is remaking, the option for Ireland to have its cake and eat it too may no longer exist. It is not yet possible to say what the impact of a trade war between the US and the EU would be on Ireland. But Trump has made little secret of his intention to target Ireland’s huge pharmaceutical industry, one of the primary drivers of the corporation tax boom. He thinks we stole it from America, and he wants it back.
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Trump’s grasp of economics may be on a par with his understanding of diplomacy, but that is hardly the point. Tariffs are coming; other changes designed to impel the US firms here to relocate their factories or their taxes back to the United States may well follow. It is hard to guess the scale of the damage to Ireland, but it is potentially severe. That will require quick action and clear thinking by the Government.
There will be budgetary consequences from all this. A continuation of the gravity-defying exchequer position of recent years is most unlikely. So the Government will have to make decisions about how it uses scarcer resources.
In framing its budgetary policy later this year, the Government should be focused on protecting those who most need the help of the State. But it should also guard against repeating the mistakes of the financial crash, when spending on infrastructure and investment was slashed in order to preserve, as far as possible, current spending. That has left us with the glaring infrastructure deficits of today, a huge and enduring cost of the last downturn.
