Budget 2026 seems to be a little less hyped than budgets from previous years. The public finances are in surplus. It won’t be an austerity budget. It probably won’t be marked by the frenzy of pre-election type giveaways from recent budgets. Inflation is moderating, incomes are generally rising again, and the cost of living ‘once-offs' are likely to be removed, pared back, or converted into permanent and hopefully targeted measures. Tariff fears have somewhat gone into abeyance. The existential threat to the economy that worried policymakers earlier this year now seems less likely to come to pass even if tariffs agreed under the EU/US deal will still hit output and employment growth.
But the lack of Budget hype doesn’t mean it won’t be consequential. The Summer Economic Statement (SES) provides for a whopping budget package of €9.4 billion at a time when the economy has clearly been booming for the last 3 years. The most recent half year results from the CSO continue this trend with GDP up 18.5% in the first half of this year compared to 2024. It’s not just about multinationals frontloading exports before tariffs land. Modified domestic demand (+3.8%) and personal consumption (+3%) also grew healthily in the first half of this year. Employment is up 2.3% year-on-year which is strong by historical and international standards and the employment rate is at a record high.
€7.9 billion of the budget package is for public spending increases (an increase of 7.3%) of which €2 billion is for increased capital spending. €1.5 billion is for tax cuts. Such an expansionary procyclical stance is surely politically unnecessary this early in the political cycle and it will ultimately reduce the economy’s resilience in the face of future shocks while modestly fuelling inflation. Somewhat oddly the SES promises that a deterioration of the tariff landscape will cause the Government to recalibrate the size of the budget package downwards. Logic suggests that Government should instead respond to a negative economic shock with a more expansionary budget. Cutting public spending in the wake of a shock would simply exacerbate any tariff induced downturn. It would have been better to start with a net spending increase in the region of around 5%, or at least something close to the economy’s potential growth rate, with additional measures held in reserve if needed for deployment as a response to a recession or sectoral shock.
My own view is that the €7.9 billion in spending increases would be better accompanied by a €1.5 billion increase in taxes leaving an overall €6.4 billion net package. SIPTU's Michael Taft makes a good case for such a strategy here. Cutting net taxes during a boom makes little sense and flies in the face of analysis from the Commission on Taxation and Welfare (COTW). The COTW argues that there is a need for gradual but material increases in government revenue as a share of the size of the economy over the medium-to-long term in order to compensate for Ireland’s fiscal position gradually deteriorating under various future pressures not least of which is population ageing.
More promising is the government’s decision to ramp up its level of spending on infrastructure. The economy is already suffering from years of underinvestment and infrastructure bottlenecks are now a major constraint on our competitiveness and are a barrier to future economic development. Much higher investment is needed in energy, transport, housing, health and water and the additional allocations to the capital budget are both necessary and welcome. This casts the budget in a slightly different light. An expansionary budget that enhances the economy’s productive capacity, and as a consequence enhances its medium-term fiscal capacity, can certainly make sense if done properly. We do ostensibly have the fiscal headroom to do it provided the windfall corporation tax receipts don’t evaporate although there are legitimate concerns about where the additional construction workers will come from given we are at or close to full employment. The Government’s commitment to continue funding the longer-term savings vehicles is also very welcome though the annual levels of funding should be increased.
In my view the overall budgetary package is much too large although the pivot towards capital spending is a very welcome shift. The five-year medium-term fiscal and structural plan will frame the budgetary parameters for the rest of this government. This plan will need to be a serious attempt to tackle questions about medium-term sustainability with a credible plan for achieving a fiscally sustainable equilibrium over the longer-term. Some ideas around this are discussed in pillar 4 of our New Economic Model proposals.
Finally, we all know that unwise pre-election promises are going to come home to roost on Budget day. I will discuss the pros and cons of the 9% VAT cut in next week’s blog as well as potential alternatives for supporting the economy that the government could alternatively pursue. There will be further NERI blogs as we lead-up to the budget.