In the 1970s, huge reserves of gas were discovered in the North Sea off the Netherlands. Even at the low gas prices at the time, this made the Netherlands rich.
When much of this bonanza was spent straight away, it made Dutch people better off. However, that extra spending fuelled inflation and led to increased wage costs.
The result was that many existing firms became uncompetitive and closed. By the early 1980s, when recession hit, the jobs they had provided were sorely missed.
When good economic news gets turned into an inflation shock and the loss of previously viable businesses, economists now call it the “Dutch disease”.
When Norway discovered huge reserves of oil, they didn’t go down the Dutch route. Instead of spending all the extra tax revenue from oil, the Norwegian government has, over decades, saved a substantial part of this windfall.
This allowed many traditional Norwegian businesses to survive. It also means that, when the oil runs out (or the price collapses as the world decarbonises), Norway will be able to maintain its high living standards.
Unfortunately this budget is likely to cause a mild bout of ‘Dutch disease’ over the coming year
For Ireland, the corporation tax bonanza is rather like finding oil (though less polluting). The lesson from international experience is that, instead of immediately splurging on all the things we need and want, we should use the additional resources to invest in a better future for the country.
Unfortunately this budget is likely to cause a mild bout of “Dutch disease” over the coming year.
The 2024 budget, announced a year ago, was broadly neutral, not adding significantly to demand pressures. Given that the economy was already at full employment, it would have been better if it had mildly reduced domestic demand.
But since last year’s budget day, there have been major overruns in expenditure, especially in health, that are much more extensive than in previous years. It’s been politically tempting to announce bigger giveaways, but to underbudget for spending that was going to inevitably happen. So actual, as distinct from planned, public spending in 2024 has added substantially to inflationary pressures in the domestic economy.
Budget 2025: What it means for Irish households and businesses
The budget announced on Tuesday further aggravates the situation. The cumulative effect of the overruns and budget-day specials will pump an additional €3 billion of demand into the economy this year, just over 1 per cent of national income. As the economy is already growing strongly, this will add to domestic prices, especially house prices.
Over half of this stimulus arises from the overrun in expenditure, especially in health. Another major portion of the injection in demand comes from increased transfers.
However, instead of targeting those most in need, a scattergun approach has been adopted, with significant payments, like the energy credits, going to those who are high up the income distribution.
The budget did announce some increase in badly needed public investment, though its effectiveness will also be adversely affected by the inflation in domestic costs that the budget itself will contribute to.
We are in the fortunate position that the State has resources to be able to tackle our significant infrastructure deficit
For 2025, the budget on paper only provides a mild stimulus of about €0.7 billion, or 0.2 per cent of national income. It would have been better to have no stimulus, and take some money out of an overheating economy. However, the real problem is we are likely to see a repeat in 2025 of the “once-off” payments in 2024, though they haven’t been budgeted for.
Without those once-offs, transfers, including welfare payments, are scheduled to fall in real terms in 2025, and an incoming government may not stick with that. It would cost more than €1 billion extra to protect the spending power of transfers next year, including repeating the “once offs”. So the real stimulus in 2025 is likely to be a lot larger than announced on budget day.
There are some good things in the budget. In particular, the provision of additional funds for the energy utilities and the Land Development Agency, to allow them undertake vital investment over the next few years.
The extra equity for the energy utilities probably won’t translate into extra spending in 2025, but will enable them to plan and deliver an expansion of the energy grid over the next few years. This is vital for a growing population, and to support the switch from fossil fuels to renewable electricity.
We are in the fortunate position that the State has resources to be able to tackle our significant infrastructure deficit, particularly if we tackle the bottlenecks, get our project management right and deliver value for money. But we need to allow budgetary leeway to spend on critical infrastructure without overstimulating the economy.
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