The Department of Finance has tried to play down the big news from the Government’s latest economic forecasts. This is that the forecast surplus of revenue over spending for 2026 is now €9.2 billion, a whopping increase from the €5.1 billion predicted on budget day last October.
While a bigger surplus is welcome, it will also increase the pressure on the Government in relation to giveaways, both now and heading up to the budget.
Ministers for finance and public spending need to be able to face several directions at once. And so in response to the annual progress report issued by the Department of Finance we hear reassurance that the economy is doing relatively well, warnings that ministers need to tighten up on spending because of the dangers ahead and promises that tax reductions can still go ahead on budget day in October.
In engaging in this attempt to sell different messages to a variety of audiences, Tánaiste and Minister for Finance Simon Harris and Minister for Public Expenditure Jack Chambers are still benefiting from what are – for now at least – strong underlying budget numbers.
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The latest forecasts reflect a stronger end to 2025 for the economy than was anticipated at budget time. Donald Trump’s tariffs turned out to be less threatening than feared and there was a surge of investment late in the year, much of it – interestingly – in data centres linked to the artificial intelligence (AI) boom.
But, despite a small downward revision to the economic growth estimate for this year, the headline is the bigger anticipated surplus – due to higher than expected tax revenues, a better position than expected on the Social Insurance Fund and a lower call on the exchequer purse by local authorities and some other agencies. The Coalition, unlike most other European governments, has flexibility within its budget numbers. How it should use this room for manoeuvre particularly in light of the uncertainties ahead and Ireland’s uncomfortable reliance on volatile corporate taxes is, of course, another question.
[ State surplus set to grow to €9bn, latest Government forecast showsOpens in new window ]
The document is largely based on what the Department of Finance calls its “reference” forecast completed in late March. It shows the inflation rate averaging 3.3 per cent compared to a budget forecast of just under 2 per cent.
The department has also, sensibly, outlined two other scenarios. One is an “adverse” scenario in which oil prices average $88 (€75) a barrel this year, meaning inflation averages 3.7 per cent. The other is a severe one – meaning real trouble – where oil is $125 a barrel and inflation averages 3.7 per cent for 2026 as a whole, but peaks at 6.5 per cent late this year and heads higher early next year.
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Which of these scenarios may apply is anyone’s guess. But the report points to what it calls “stagflationary impulses” – in other words, growth will be lower and inflation higher than previously anticipated. The only question is by how much.
Importantly, even in the worst scenario, the department believes the economy will keep growing, and thus avoid recession. Of course even more dire scenarios are possible – we just don’t know.
The Department of Finance presentation goes out of its way to underline the risks to the exchequer finances. It focuses on the exchequer’s cash account which is already in deficit, but only because cash has been transferred to the two funds designed to support investment spending in future. This is netted out when it comes to the general government balance, the key European Union borrowing measure, which thus remains in surplus.
This means that the Government is going to remain under relentless pressure to help households and businesses. Public pay talks to come will be difficult. The Government will underline the risks ahead and the need to keep cash in reserve in case things get really nasty next winter.
It also wants to underpin its vital investment plans. Those looking for cash will point to the additional resources at the Government’s disposal.
In response, the official messages are mixed. Minister for Finance Simon Harris talks of the Government keeping its powder dry, but is also trailing plans to spend money.
Taxes will be cut in the budget, he said, mindful no doubt of the blowback last year from not adjusting bands and credits for inflation. Households energy credits are not being ruled out.
And the Government has already committed to spending €750 million extra in two supports packages and is increasing its expenditure ceiling for 2026 as a result – and also to account for higher spending in education.
This shows the real struggle facing Minister for Public Expenditure Jack Chambers in trying to reduce the growth in spending from the runaway levels of recent years. Ceilings he set in December are revised by April. Chambers has flagged a future “levy” on government departments to help make up for some of the overspending on budget targets -meaning a general requirement to find savings to keep the figures on track.
The ideal economic strategy for the Government now is to try to keep some cash in reserve in case things do get really bad heading into next winter, so that it can inject some additional cash then to meet urgent needs and provide general support to the economy.
Instead, if the worst does not happen and oil prices settle, it will be seen as giving the green light to budget tax cuts and spending rises. The practice of the State spending cash when it has it is hard to break in an environment where every interest group is pushing for more.
