View from Dublin: candidates for Taoiseach unveil plans
Economic recovery these last few years, combined with very low interest costs on new government borrowing, has brought the budget deficit down sharply. But Brexit threatens the economic outlook and the European Central Bank will likely commence raising interest rates back up to normal from 2018 onwards.
Outstanding Exchequer debt remains at dangerous levels: relative to government revenue, Irish official debt is amongst the highest in the eurozone. If growth were to slow and the deficit to climb, borrowing conditions could get difficult again very quickly.
The context in which budget policy is framed, in a country without its own currency and hence with no capacity to create liquidity in a crunch, is greatly constrained by the overhang of debt. Until the budget can be brought into surplus and the overhang begins to reduce, there is a continuing exposure to less benign conditions in the international sovereign debt market.
So any early relaxation of budgetary policy is fiscal bungee-jumping: it comes with the attached risk that it could have to be reversed suddenly and in adverse circumstances.
The European Commission, in its recommendation for Irish policy released last Monday, has urged caution, and its advice matters since there are enforceable rules for budget balance under EU procedures agreed in response to the financial crisis. Just as well: Irish politicians in government and opposition seem to regard the improved budget position as the signal for a new round of tax cuts and spending increases.
The commission's document should remind people that, until the debt overhang is much reduced, this is not permissible. Of course, it is not advisable anyway, even if there were no EU rules.
Either Simon Coveney or Leo Varadkar will effectively be Taoiseach a week hence - and both have released lengthy documents outlining their policy positions. They display the standard commitment to financial prudence which adorns, like the bonnet badge on a new car, every such document extruded by the Irish political system, in manifestos, budget speeches and leaders' addresses to party conferences.
The mandatory fiscal rectitude paragraph is followed promptly by proposals for tax reductions, extra expenditure or both. Given the reality of Ireland's debt burden, these will either be abandoned or will compromise the pieties about fiscal prudence.
Leo Varadkar's document goes into greatest detail. There will be tax reductions, with a cap on the maximum take from earnings, reductions in Dirt and capital gains tax, an increased homemaker's tax credit and higher deductibles for medical expense.
The spending promises come thick and fast: extension of parental leave, restoration of bereavement benefit, better redundancy payments, extension of fuel allowance, State support for fertility treatment, increased back-to-school clothing allowance, reduced charges for school transport, subsidised schoolbooks and tablets, more school breakfasts, and a dedicated 'urbanism' fund are among the pledges.
Simon Coveney is less specific about ideas to increase current spending but has produced a truly monster proposal for the capital budget. His document envisages commuter services connecting Galway to Dublin in one hour, suggested as a solution to housing shortage in Dublin. Building houses in Dublin is a rather more obvious alternative.