A lot of Irish people are doing very, very well

If you want to beat rises in the cost of living, you must stop trying to do so by throwing money at it. The more money you throw at price rises, the greater the rise in prices will be. This simple maxim is at the heart of the government’s dilemma as it faces into the first budget of its new term.

It’s a big challenge. When you are a government with a budgetary surplus, what do you do when prices keep rising and people feel under pressure? Everywhere you go, people will say that you should put money into their pockets to meet those pressures, but is that really wise, or even effective?

This divide – which is within the government as much as it is between the government and the opposition – will be at the heart of our public debate between now and the budget. The stories and reports about how this group or that group are struggling will fill the media every day now. In response, the Ministers for Finance and Public Expenditure will issue warnings from time to time about not allowing spending to get out of control.

Behind all this is the bigger economic picture, and the big question about what role the state should play in the economy. In normal times and situations, that role is pretty straightforward. When the economy is struggling, the state should increase spending and reduce taxes – if it can – to provide a stimulus and get things moving again.

When the economy is ticking along nicely, the state should keep its spending on an even keel.

And when the economy is booming, it should be reined in by being careful on spending and in some areas increasing taxes, so as to build up a fund which can be used when there is a downturn. Throwing money at an overheating economy is always a bad idea. In such situations, the best thing the state can do is use its power to incentivise people towards putting money towards things that are needed – like housing delivery and pensions – and away from things that are not needed so much, like pizza delivery and any other number of discretionary comforts.

That is how it is supposed to work in normal situations, in normal times. But nothing about the Irish economy is normal anymore. And the root of that abnormality is corporation tax. It has distorted standard economic reality.

According to the Irish Fiscal Advisory Council, even if you take the money from the Apple case out, the receipts from corporation tax – tax on the profits of companies – have almost tripled since 2019. They now account for almost 30% of our total tax take, an unprecedented figure. Using that money, we have more or less doubled our total public expenditure over the last decade. And we have done it while at the same time reducing the share of tax we take from elsewhere.

No one knows whether those corporation tax receipts have peaked, or whether they will grow, or whether they will start to decline. What the government has said is that a big chunk of it is what they call a ‘windfall’. That means they think there is a good chance it won’t last. Most of that is estimated to come from just three companies. Much rests on what they might do in the future. A fair slice of that windfall sits in your pocket, today.

Now the government is saving about a third of this money and that’s good. But we are spending the rest. And we are spending it into an economy which is clearly overheating.

You don’t need an economic study to know that. Walk around anywhere in Ireland. The country is wedged with cash.

Most people will tell you that they don’t have enough of it, and for some of them that is surely true. But a very large portion of our citizens, particularly if they own their own homes, are living so high on the hog in their day-to-day lives that you would need blinkers not to see it. Never mind what you hear on the radio about our country being the worst of this, and the most awful of that: the reality is that for many Irish people, they are doing extremely well, thank you very much. For them, price rises are an irritant rather than a threat.

Now many people aren’t in that position. That usually means people who don’t own their own home and surprisingly often involves people who on the surface have a good income, but who, after they pay the rent, don’t. For them, price rises are a massive problem.

What does the government do in that situation? It is obvious that the Irish economy – right now – does not need stimulating. It might in the future, especially if those tariffs bite into our real economy, or if the corporation tax returns start to decline, and we have to adjust public spending. We remember how painful that was after the Celtic Tiger.

In that context, in this upcoming budget, putting extra money into everyone’s hands doesn’t make any sense. That is why the one-off cost of living increases simply had to be tackled and ended.

That decision has been made but many others lie ahead involving other proposals to put more cash into pockets. But surely what we actually need to do is reduce the enormous pile of cash in our society that is chasing too few consumer goods – that is a major reason for inflation. In one sense, that seems counter-intuitive. But if you want to do something about inflation, you have to stop giving everyone money to counter the effects of inflation. Over recent years, do you not think that the people who sell stuff in Ireland haven’t noticed what has been going on? If the government keeps injecting money into people's pockets, do you not think the people who want to take it out of yours won’t respond accordingly? Why wouldn’t they?

The debate between now and the budget is essentially about how to manage fire. You can keep shovelling money into it or you can put the damper on a little. With no certainty whatsoever about how much money we will take in over future years, what to do would seem obvious. But with a population which has got used to all those extras, and with some people who are genuinely under pressure, managing all this is no easy job. That’s what government is all about, and if you think it’s easy, you probably haven’t had a go at it. But that doesn’t mean the right thing to do isn’t clear.