This week we got a State investment plan with no list of projects and a pre-budget document with no estimate of the likely position of the public finances next year. Economic nerds like me felt short-changed.
The first document was all uppy stuff about boosting investment and securing the future. The second doubled down on the scary backdrop provided by a changed world and the unpredictable actions of Donald Trump.
The Government has clearly made a political decision to “go for it” on State investment. But the document published this week was more a manifesto for the multinationals than a plan. It was a pitch to foreign investors, who have become increasingly outspoken about Ireland’s energy and water infrastructure and the lack of housing for their staff. And it was a bid to try to allay public concern – on housing in particular. The head-wrecking details, including how to deliver it all – most notably in housing – are still being worked out.
The decision by Amazon to abandon a project in northwest Dublin because of problems getting an electricity connection is by no means a first. There has been a building crisis of confidence in corporate headquarters in the US about Ireland’s ability to deliver on these areas – and this week’s plans are an attempt to send a message to these American boardrooms, who are central to our economic wellbeing. They will also look for evidence that Ireland can actually make this happen - reassurances over the years that the key infrastructure areas were being addressed have not been delivered on.
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And so we have a €102 billion, five-year investment plan. It is, for sure, heading in the right direction. The Fiscal Council has estimated that Ireland’s infrastructure is 20 per cent to 25 per cent behind other richer EU countries. In this context, the recent growth rate of the economy has been remarkable. But Ireland is now running hard into the infrastructural buffers.
Turning this investment manifesto into a fully coherent plan and then implementing it will be a big task. Ireland has struggled to deliver on the scale of promised investment in recent years; Covid was factor, for sure, but the State missed opportunities to cash in on a time of fiscal plenty. Now, it plans to boost investment plans just as the outlook is getting uncertain. It is necessary – but it also carries some risk.
It looks like a turning point may be approaching in the national finances, when more difficult decisions await and trade-offs have to be faced up to. The State has been swimming in cash in recent years – but the budget surplus is being eaten away.
And this means some politically difficult choices, which have yet to be squarely faced. Corporate tax is still funding a spending rise across the board. The Government plans to increase current spending by almost 6.5 per cent next year, well ahead of inflation.
However, the combination of a big investment plan and Donald Trump’s policy decisions are changing Ireland’s fiscal arithmetic. In the spring, the forecast budget surplus of revenue over spending for next year was €6.3 billion. And that was before any tariffs. This week’s document does not update that figure. But on the basis of what we now know from this week’s documents, economists have cut this forecast to around €2 billion.
As Goodbody stockbroker economist Dermot O’Leary pointed out, this is a small margin for error in the light of the tariff threats and the hugely concentrated nature of our tax base. And the gamble is not so much that the State might have to borrow a bit for a few years to ramp up investment. It is that a bigger hole might appear, because such a large part of our corporate tax is potentially transitory – based on multinational tax planning rather than economic activity here – and that policy changes in the US could lead to some of this cash leaving. The Fiscal Council estimates that subtracting the tax planning froth, the public finances would be heading for a deficit next year of €13 billion.
Now we are, of course, into “crying wolf” territory here. The council, Central Bank, Department of Finance and most of us who write about economics have been warning about this risk for years. In the meantime, the tax paid by multinationals has just kept heading higher. And this may not be over yet. The Fiscal Council has said that corporate tax may again outperform this year compared to forecasts, which could give the Government some leeway in 2026.
But that does not remove the risk of hanging on to a tax pile which has grown so large than it has now attracted jealous eyes not only from the rest of the EU but from Washington DC. And the State investment plans lower the room for manoeuvre if something goes wrong. If you plan to spend another €34 billion over the next five years, it has to come from somewhere, and using an expected budget surplus each year to help pay is part of the plan.
Already, there are signs of the budget scope tightening. We are seeing the potential juggling in Budget 2026, with the hospitality VAT rate possibly deferred until midyear to leave scope for an income tax package. But that is a bet that the cash will be there to pay for a full-year VAT cut in 2027. And this is really only budgetary small beer, if the Government is to really slow the growth of day-to-day spending to leave room for more State investment.
If it does not, then any fall-off to corporate tax will leave tricky decisions. For example, the Government is committed to putting money into two State funds for the future. It is legally obliged to do so, though can stop if there is a downturn. But if the numbers do get tight, does the State borrow cash to then invest in these funds – which would look very strange? Or does it divert money from other cash holdings?
Sitting watching will be the National Treasury Management Agency, which was set up to borrow on behalf of the State. It has had a quiet time on this front in recent years, with the budget in surplus and a requirement just to keep things ticking over and refinance maturing debt. Now, as the State finances tighten, it may soon be back in business.
