Chief economist warns: All roads lead to inflation
The Tánaiste has played down recession fears, saying: “This is not 2008,” writes Brian Mahon.
However, the chief economist in the Department of Finance, John McCarthy, said it was “impossible” to “assign any probability to a recession,” adding that whatever happens regarding the Iran war, “all roads lead to higher inflation”.
Simon Harris and the chief economist made the remarks while setting out the first-quarter figures for the economy.
Speaking about the war in Iran and the potential for a prolonged economic crisis, Harris said: “If this escalation continues, particularly involving critical energy infrastructure or key maritime routes, the global economic consequences will be significant, and we will face an economic challenge of varying scale, substance and severity, depending on the course of action [of] others in the hours ahead. No government can fully shield its people from a shock of that magnitude.
“But what... this government is doing is acting decisively, in an informed manner, and in a way that seeks to protect the most vulnerable and sustain our economic stability.”
He continued: “Ireland is in a strong position to navigate this period. This is not 2008 – we have full employment, we have a growing economy, which is crucial.
“We have public finances that are managed in a way that gives us options. It’s because of that disciplined approach that we now have fiscal capacity for external shocks... It’s more important than ever that we maintain a balanced and sustainable budgetary strategy.”
McCarthy added: “In terms of the scale of the shock to the economy, it really will depend on the disruption to energy supplies, and, quite clearly, that’s unknown and unknowable.
“Even in the best-case scenario, all roads lead to higher inflation. I think the idea of a kind of short, sharp shock has receded.’ He continued:
“The Tánaiste mentioned some of the differences between now and 2008, and mentioned, quite correctly, the... government’s balance sheet, which is in a much better position. Lots of financial assets and liabilities are quite low. I’d go a little further and say household balance sheets and corporate balance sheets... are in a much better position than they were.”
Asked by the Irish Daily Mail to rate on a scale of 1-10 the likelihood of a recession occurring as a result of the war, McCarthy said: “At this point, it is impossible to assign any probability to a recession or otherwise.”
He said the department was working on three scenarios, the first of which was benign and a relatively short, sharp shock. McCarthy said it’s “less and less likely” this is about to unfold.
He said they were also preparing a scenario where oil remained at around $100 a barrel, which would have a “large” impact. A third scenario will sketch out what the Irish economy would look like at $150 a barrel. It comes as there was a 3.4% increase in the amount of tax collected by the government in the first quarter of the year, compared to 2025.
Exchequer figures released yesterday show receipts of €22.6bn were collected in the first three months of 2026. There was a 6.1% rise in income tax to €8.7bn, and a 5.3% rise in VAT receipts to €8bn.
Niamh Callaghan, Jack Chambers, Simon Harris and John McCarthy. (Pic: Leah Farrell / © RollingNews.ie)
While an Exchequer deficit of €200m was recorded, McCarthy explained that it was largely a “timing issue” as a result of money being transferred to Ireland’s long-term investment funds, the Future Ireland Fund (FIF) and Infrastructure, Climate and Nature Fund (ICNF).
McCarthy also described the increase in tax revenue as “solid” without being “spectacular”. Also, government spending was up €1.6bn compared to last year.
Photo: John McCarthy, chief economist at the Department of Finance. (Pic: Leah Farrell / © RollingNews.ie)
