Gavan Reilly: Government must remember the small stuff when sat at the big table

Regular readers may recall that I sounded a note of caution when Simon Harris took over the Finance portfolio late last year, given the differing attitudes that he and Micheál Martin have in the event of a financial downturn. Harris ran his election campaign on the premise of tax cuts for workers – which he didn’t deliver in the first budget – while Martin says maintaining public spending is the first priority..

Those two leaders are lucky that the latest tensions in the Middle East have flared up so far ahead of Budget time – I wouldn’t want to be refereeing a debate between them, if the weekend’s events had happened in September.

It’s still only early days but the markets are beginning to whisper the sort of words that would usually make finance ministers break out in a cold sweat.

Geopolitical shocks aren’t static. There’s a good risk now that a conflict centred on Iran – whether a prolonged standoff in the Strait of Hormuz, an escalation of regional hostilities, or an all-out brawl between Israel and its enemies – transforms into a genuine macroeconomic shock. A longer-standing conflict might, for example, would almost certainly result in curtailed oil production and higher fuel prices with knock-on consequences for the entire cost of living.

For an export-led country like Ireland, that’s a worrying vista, because the fiscal headroom the Government likes to talk about (i.e. the wriggle room available for new measures in a Budget) isn’t a fixed amount, but depends on variables like economic growth, tax revenue and investor confidence.

So if there’s an ongoing war, the appetite and scope for tax cuts suddenly looks a lot smaller, and what seemed plausible in a stable world starts to look like an unaffordable luxury. It won’t take much for the Iran war to morph into both a political and financial calamity.