Gavan Reilly: 2025 yielded €2bn in fuel taxes - how much of that can the Government give up?

Calling the tune: A moment from the fuel protests that triggered the current tax cuts. Sasko Lazarov via RollingNews.ie

Seriespolitics by numbers

The cash is there to increase further discounts on fuel taxes, but not if it's to become a semi-permanent fixture.

Gavan Reilly

In Politics by Numbers, broadcaster, author and spreadsheet stan Gavan Reilly takes a data deep dive into a political point of the week.

THE REGULAR DEBATE around inheritance tax, and whether it should be reformed to be less punitive on childless adults, is a good example of the power of the status quo.

Why should a child be able to inherit €400,000 tax-free from their father, but only €40,000 if it comes from an uncle? What if the uncle had experienced infertility, didn't want children of their own, or simply never met the right person to start a family with?

Why should the State get a bigger cut of the uncle's estate simply because their next-of-kin was born to someone else? Should the tax paid by a child on their inheritance be influenced by which adult changed their nappies, or brought them to more soft play centres?

If you were designing a tax system on a blank sheet of paper you might consider the current system to be unfair - but if you were responsible for running Ireland's tax system today, you could find it hard to unpick and reform.

The reason is that once a tax has started to bring in a steady and significant income, it's harder to forego that revenue and introduce something that you might consider objectively fairer. Inheritance taxes in Ireland yield somewhere between €850 million and €1 billion a year - so while there is almost universal consensus that the status quo could be fairer, it's harder to make do without the cash it brings in.

The power of the status quo

I draw this analogy because I think it's a useful illustration of the difficulty faced by the government as it now stands at another strategic crossroads: how much tax to put on motor fuels.

Most readers will not need reminding that the temporary cuts to fuel taxes, introduced in March and increased in the wake of national protests at Easter, are due to start reverting from next week.

Excise on petrol will rise by 7c, and diesel by 8c, per litre from 1 September, while a 2c per litre levy to fund the National Oil Reserves Agency will also be restored.

When you include separate pre-scheduled increases to carbon taxes from mid-October, the overall taxes on a litre of diesel will be about 34c higher on 2 December than they are now.

It hardly needs spelling out so long as the cost of fuel remains at present levels, that this is a total non-runner. Everyone hopes that the conflict in Iran can be resolved, one way or another, so that oil shipments can leave the Strait of Hormuz and the imbalance between supply and demand can be resolved in the customer's favour. But the only governments capable of resolving the row are the United States and Iran - and it's not as if Washington radiates clarity, what with its simultaneous claims that Iran is actually defeated, while still threatening to bomb allies if they get in the way.

So what's a country like Ireland to do?

Objectively, if modern-day prices are the 'new normal', it's a non-runner to restore the taxes to their previous traditional levels.

But can it afford to go without those taxes? That much is far less clear. For the full year 2025, excise on petrol, diesel and green diesel brought in over €2 billion. It's already cost the State €750 million to lower those taxes for some of 2026, and to introduce time-limited supports for high-using industrial sectors.

It might be affordable for the State to defer some of the pre-scheduled increases for the months to come - but the key word is 'might'. The status quo has turned out to be rather lucrative.

When is a contingency not a contingency?

Budget 2026 included a €1 billion contingency fund, ostensibly continuing a habit of leaving money aside for the ongoing unknown costs of the pandemic or the war in Ukraine. But even as this cash was set aside, ministers already knew where much of it would go.

About a quarter would go on the one-off costs of hosting the EU Presidency this year. Separately, because 1 January was a payday for the public sector, there are 27 public sector payrolls to run this year instead of 26 - costing another €400 million or so. Take out €200 million for the mid-year bailout of the Department of Education as it scrambles to make adequate provision for children with additional needs, and there's no contingency left.

So the temporary tax cut on motor fuels isn't being paid for through contingencies.

Rather, it's simply being funded by the surplus: rather famously, Ireland is running an exchequer surplus of about €9 billion this year, so there's plenty of scope to forego taxes. Isn't there?

Maybe there isn't. That €9 billion is before the State sets aside its contribution to two long-term funds, which will take up about two-thirds of it. And more pertinently, the €9 billion (or the €2.5-ish billion) includes levels of corporate tax that almost nobody considers stable. The Fiscal Advisory Council reckons that if you strip out the volatile bits of corporation tax - linked for example to intellectual property that could leave Ireland very quickly - the State's underlying "structural" deficit is actually about €11 billion.

This is manageable so long as the 'windfall' bit of those taxes is spent only on one-off long term projects - ie, on capital expenditure, like water plants and train lines, instead of recurrent everyday stuff like paying Gardaí and nurses.

The cash is there to increase further discounts on fuel taxes, but not if it's to become a semi-permanent fixture.

Virtually every independent economic assessment says Ireland needs to expand its tax base; a not-very-temporary cut to fuel costs (having already given some sectors a permanent cut on VAT) would merely narrow it.

That leaves the government in a bit of a pickle. Restore the fuel taxes on schedule, and risk a surge in inflation - as well as a wintry repeat of the backlash from April. Leave them alone, and ministers will find themselves immediately eating into the €1.5 billion set aside for other tax cuts in 2027.

One option is bad politics, the other is bad economics. Whichever it is, may be the most consequential decision of this government's term.

Gavan Reilly is the Political Correspondent for Virgin Media News and the host of Monday with Gavan Reilly, which airs every Monday at 10pm on Virgin Media Play and Virgin Media One.