During the bubble period leading up to the financial crash in October 2008, Ireland enjoyed an extended period of healthy, or apparently healthy, budget returns.

There had been a reasonable balance between Government revenue and spending, despite tax give-aways and a big capital programme.

The reason was the unexpected strength of tax receipts – stamp duties on property transactions yielded far more than had been expected, flattering the budget figures.

It all came crashing down when the banking bust coincided with the evaporation of the unusual tax bonanza – property tax revenue collapsed; there were huge costs for bailing out bank creditors, the budget went into enormous deficit very quickly and the State required an international bail-out from the IMF and European institutions.

Despite a low legacy debt burden, the finances deteriorated so quickly that, from 2010 onwards, the State could not borrow on the markets at all, one of the few European countries since the 1950s to have suffered this fate.

There was a severe correction to Government finances including tax increases, public service pay cuts and widespread cancellation of capital spending projects under the supervision of lenders, the ‘troika’.

Public spending on capital projects halved in just five years to 2013, contributing to the infrastructure deficit now so evident around the country.

Warnings

There had been numerous warnings about excess credit growth in the bubble years, but they went unheard and the scale of the coming collapse was largely unforeseen.

The official expectation was for a ‘soft landing’. The budget for 2008 provided an 8.2% increase in current spending, as well as tax reliefs, at a time when the inflation rate was just a shade over the 2% eurozone target.

The capital programme for 2008 was to be 12% ahead. These expansive plans went up in flames during 2008 and the years following are remembered as a period of austerity.

Avoiding these periods of cutbacks when the economy has weakened anyway requires that lessons be learned.

The first lesson is to protect against banking busts, through better bank supervision and the containment of aggregate credit growth.

The second is that the Irish economy is small, volatile and exposed to external events, a reality that cannot be circumnavigated, and the third that sudden bursts of buoyant tax revenues cannot be assumed permanent and should never be used to fund continuing expenditures.

Ireland was unlucky under all three headings in 2008. The banking bust was, relative to the size of the economy, one of the largest on record and the fiscal costs were crippling.

The appearance of budget balance, and of a comfortable legacy debt, evaporated rapidly as the economy contracted in response to depressed conditions internationally.

The decline into fiscal cutbacks, exacerbating the downturn, followed the disappearance of the property tax bonanza and with it the creditworthiness of the Irish State.

Bank supervision

Bank supervision has been tightened and the surviving banks have strengthened their balance sheets.

Household balance sheets are also stronger, buoyed by COVID-19-era savings.

Capital spending has been fully restored to pre-austerity levels and there are ambitious plans for setting new records in the years ahead

But Government current spending has risen quickly in recent years and some of the commitments have attracted criticism from the Irish Fiscal Advisory Council as constituting a permanent call on revenues which may prove transient, as they did in 2008.

Capital spending has been fully restored to pre-austerity levels and there are ambitious plans for setting new records in the years ahead.

There have been tax reliefs too.

The risk is that corporation tax revenues will decline in due course, possibly coinciding with a slowdown in trading partners where the recovery is sluggish.

A new banking bust looks unlikely but the fiscal situation is precarious, especially the sustainability of high capital spending. There is a long record in Ireland of a boom-and-bust pattern in the capital budget.

Temptation

When things go wrong and fiscal balance must be restored quickly, the temptation is to slash capital spending, which can always be defended as the deferral, not the cancellation, of politically popular projects. This stop-go cycle is long-established and was a feature of the 1988 to 1990 fiscal correction and of earlier episodes in the 1950s.

It has been a contributor to excessive cost in delivering capital schemes as projects are placed on hold and planning consents expire.

The Government has been making expensive commitments to new capital projects in areas like renewable energy, including offshore development in the Atlantic, and a national rail plan, for which no detailed costings have been provided.

Meanwhile, there is an acknowledged backlog of infrastructure priorities in housing, health, rural roads and elsewhere, with the presumption of an elastic budget for capital projects. In current circumstances the credibility of long-term commitments under the National Development Plan is in doubt unless sustainable public finance can be guaranteed.

The lesson of history is that it never can be. Misfortune strikes hardest for the unprepared.