Last week, as Simon Coveney announced he was exiting politics at the next general election, Heather Humphreys and Paschal Donohoe celebrated the 10th anniversary of their appointment to cabinet. 

Taoiseach Simon Harris, a relative novice at the cabinet table by comparison, marked the occasion with a bouquet of flowers and some kind words. 

Ten years is a long time for anyone. In politics, it is an eternity. 

Humphreys and Donohoe are serving under their fourth taoiseach. If Fine Gael is re-elected to government after the next election, both would be expected to be reappointed without fuss or fanfare.

For much of that time, Donohoe has worked in the same building, either as minister for finance or minister for public expenditure and reform (and, for a period, minister with responsibility for both departments.) He has been a key architect of Ireland’s budgetary and economic policy since 2016, dealing with the country’s response to Brexit, a pandemic, and a cost of living crisis. 

Over that period, I have interviewed him on numerous occasions, both in my former role as editor of The Business Post and in my work with The Currency.  

However, as Donohoe begins work in earnest on Budget 2025 (with his third budgetary “partner” Jack Chambers), there is one interview that keeps coming to mind. In 2019, shortly after the launch of The Currency and days before he unwrapped Budget 2020, Donohoe gave an in-depth interview about his political and economic philosophy, starkly refuting critics who urged him to show more caution by reining in public spending.

“That is the balance that I always have to try to get right. I am responsible for an economy inside a democracy. Not a democracy inside an economy. That middle line is what I’m focused on trying to deliver,” he said.

Budget 2025, however, has another dimension. Regardless of whether the next general election is held late this year or early next year, it will be the Government’s last throw of the budgetary dice before people cast their ballots. 

Donohoe has long been conscious that a budget is about more than the economy. This year, however, there is a clamour to use the State’s mounting budgetary surpluses to appease as many people as possible. 

Budgets are always notoriously difficult. Pre-election budgets are more difficult still. 

Warnings, inflation, and windfalls

It is thinking about Donohoe’s “middle line” sentiment within the context of the Summer Economic Statement, which was released last week by Donohoe and Chambers and which sets out the spending parameters for Budget 2025.

The plans for the budget are significantly more expansionary than April’s Stability Programme Update. Total spending will rise by 6.9 per cent in 2025, once again breaching the Government’s own National Spending Rule, which is supposed to limit overall annual spending increases to five per cent. (I can’t help but think someone in Government Buildings put the brakes on spending to ensure that the figure did not break the symbolic level of seven per cent.)

All told, the Government will release almost €10 billion into the economy, an additional €1.5 billion for the Department of Health this year and €8.3 billion available for October’s budget across expenditure increases and tax decreases.

It is a massive sum, although its true impact on the day-to-day lives of taxpayers will be limited – as Thomas rightly unpicked last week, the bulk of the package will go on masking health overruns (now breaching obscene levels) and on price-indexing taxation. The government is largely maintaining the status quo in a country where things are becoming increasingly pricey.

Nonetheless, the scale of the spending and the fact that the spending targets are once again being breached has led to a chorus of voices warning against the perils of a giveaway budget. 

And, sadly, many of those warnings are sound.

Take the Irish Fiscal Advisory Council (Ifac). There was a time when disagreements between governments and their economic advisers took place in oak-lined boardrooms. Now, they take place on social media. 

The state’s fiscal watchdog barked on X last week, picking apart the Summer Economic Statement in a series of tweets. 

The message was simple: the economy does not need more money pumped into it from Budget 2025, and breaking the National Spending Rule increases the risk of the economy overheating and adds to inflation pressure.

“The government appears to be avoiding making choices in Budget 2025. Instead, an ‘everything now’ approach of current spending increases, tax cuts and increased investment are all planned for next year,” according to the council.

When the concerns were put to Donohoe last week at the launch of the Summer Economic Statement, he batted it away because the country was running a surplus. 

“I’m confident that we wouldn’t have been in a position that we’ve been running surpluses over the last number of years to such a level if we didn’t have a five per cent spending target in place. Obviously we’re not in a position where we’re meeting that figure today, but what we are indicating is further surpluses for this year and next year,” he said. 

“But again, if I look at the components of that figure, the components of that figure are how we maintain existing services to our country, in our health services, and how we can ensure that, for example, the public pay deal, that is in line with wage growth that is happening across the rest of our economy, is funded and paid for also next year.”

Ifac, however, has a different view, pointing out again that the flow of “windfall” corporation tax receipts is masking an underlying deficit. 

“When windfall corporation tax receipts are excluded, the government is planning on running a deficit of €5.5 billion next year (1.7 per cent of GNI*). This comes while the economy is performing well. If underlying surpluses are not being run now, when would they be run?” it asked.

While Donohoe talked about infrastructure, Ifac countered that plans for investment in 2025 are unchanged from the April forecast and that “all the increased spending in 2025 is for current spending”.

Ifac is not the only one concerned. One of the first letters Jack Chambers received upon his appointment as minister for finance came from the Governor of the Central Bank Gabriel Makhlouf in his annual pre-budget warning.

Chambers should have known what to expect. After all, analysis from the Central Bank has previously suggested that breaking the spending rule in the last two years has made prices one per cent higher than they would have been otherwise.

And Makhlouf stayed true to form. “It is important that the rule is complied with,” Makhlouf said of the five per cent National Spending Rule, adding that the government needed to broaden the tax base to fund growing spending demands and priorities. 

Speaking to reporters on the sidelines of the European Central Bank’s annual conference in Sintra this month, Makhlouf doubled down, saying the government risked “making the inflation problem worse by overspending” on measures to tackle the high cost of living.

Ireland’s inflation rate (in the EU harmonised format) fell to a three-year low of 1.5 per cent in June, below the 2.6 per cent Eurozone average, and the Government is now forecasting headline inflation this year of two per cent, down from 5.2 per cent last year. 

Makhlouf wants to keep it that way. “Fiscal policy should support monetary policy and not the opposite,” he said in Sintra. 

From an economic perspective, the Fiscal Advisory Council and the Central Bank are right. Unemployment is at record lows, and growth is strong. The economy does not need expansionary fuel.

But as Donohoe told me almost five years ago, he is not running a democracy inside an economy. 

As we have seen throughout Europe, there is a rising disconnect between the macroeconomic numbers and what people are feeling on the ground. In our podcast on so-called peak populism last week, Thomas explained to me how discontent had grown against Emmanuel Macron in France despite high employment numbers and increasing wages. We have seen this trend in Ireland also, even if the governing parties rebounded in the recent local and European elections. 

Inflation might be coming down, but it has not gone away, and people are still feeling the effects of the recent surge in prices. And those prices have outflanked wage increases. In real terms, many people are poorer now than they were two years ago. 

Meanwhile, a handful of multinationals are driving the tax take further north. People see the money and they want to feel it. 

This is something that Donohoe, now a 10-year veteran of cabinet, is aware of. 

Budgets are not just about numbers. They are also about how people feel. 

Elsewhere last week...

The team at Renatus, a private equity firm that has raised €110 million from investors through three separate funds, have developed arguably the most comprehensive dataset on current M&A deals and trends in Ireland. The company also tracks fundraising announcements as part of its work.

The data for the first six months of the year, shared with The Currency, offers a deep insight into the M&A and fundraising climate in Ireland, identifying the sectors that are being chased by domestic and international money. It also shows where that money is coming from – both in terms of geography and investment type.

For 39 years, the Screen Scene Group has been a pioneer in visual effects and post-production with credits from Game of Thrones to Shogun. Now its management team has closed a buyout returning the business to Irish ownership. CEO Jake Walshe talked to Tom about the deal - and what is coming next.

A week after Taylor Swift wore her gloves, the Irish designer Paula Rowan talked to Alice about celebrity endorsements, deals with luxury department stores and the importance of the weather going in her favour.

Experienced business investor Kevin MacSweeny has just bought a 20 per cent stake in Kevin Canning's Quintas Capital. As it launches a new equity investment division for SMEs, Canning and MacSweeny talked about strategy, cheque sizes and deal pipelines.

David Power, a co-founder of Paddy Power, passed away this week. The company's former chairman Fintan Drury recalled a warm and thoughtful man who wore achievement, especially business or financial success, so lightly that he barely wore it at all.