A lot has been said about Budget 2026 but it’s worth emphasising some key points.
The budget is clearly expansionary and inflationary. The net spending increases (i.e. gross spending net of tax changes) of €9.4 billion are well above the sustainable growth rate of the economy. The budget is also taking place in the context of an economy that is now years into an economic boom, with close to record employment rates, a projected half a million extra in work between the end of lockdown and the end of 2026, and evident labour and infrastructure shortages across the economy. If we put the facts together it is abundantly clearly that the budget is firmly pro-cyclical and that the fiscal stance is too loose. We are channelling the 2000s with boom-time budgeting for a boom-time economy.
It is true that we have a projected surplus in the public finances next year of close to €5 billion. Unfortunately, the recent headline surpluses seem to be engendering a troubling sense of complacency to the longer-term fiscal squeeze that an ageing society and other pressures will bring. The truth is that the only thing differentiating Ireland from the deficits and austerity facing France, the United Kingdom and other Western economies is the windfall corporation tax receipts emanating from a tiny group of US multinationals. These companies are exploiting Ireland’s tax regime to reduce their corporation tax payments with Ireland benefiting as a side effect. They can easily change their tax arrangements and the corporation tax yield is extremely vulnerable to policy shifts in the United States, downturns in the fortunes of individual companies, or boardroom decisions to move IP assets out of Ireland. If these receipts were to vanish we would be left with a yawning deficit in the public finances. While this may seem a low probability event to some it is still a high risk strategy to rely on these taxes. The windfall taxes should all be saved not just a portion of them.
Notwithstanding this concern, many of the policy directions announced in the budget are broadly positive. Moving from universal once-off payments to targeted income supports was a necessary shift. Higher spending on infrastructure is really welcome given our severe capacity constraints in energy, water, transport, and of course housing. The housing and infrastructure crises are profound and need to be addressed with decisiveness. Unfortunately, it is not clear whether the increased budget allocation will even be spent. We simply don’t have the domestic construction workers to quickly ramp up supply. Is there a plan to divert workers from elsewhere or to improve productivity through regulatory or other reforms? The reality is we will need to import the relevant workers.
While far from an austerity budget it was clearly not a populist one. Effective tax rates will increase, albeit very marginally, for most workers. But context is important. Ireland’s ratio of government revenue to economic output is well below the average for the European Union once we exclude the potentially footloose corporation tax receipts. This doesn’t imply that income tax paid by workers shouldn’t be indexed for inflation or wage growth but it does mean that some taxes will need to increase over the medium-term. The decision to cut taxes for the hospitality sector at a time of full employment – the lowest paying and least productive sector in the economy – is a particularly bizarre one. Wasting €700 million on a policy that will generate little to no new jobs is a breathtakingly feckless waste of resources. We could have hired over 11,000 nurses, made public transport free, or taken 50,000 children out of poverty with that money. Unfortunately, the evidence free tax breaks for the business lobby follow a well-worn pattern of responding to complex policy issues with a blunt, ineffective and regressive tool. Instead, the needed direction of tax reform is to move in precisely the opposite direction through a medium-term project of generating billions in additional revenue by gradually winding down these types of tax breaks. There is also significant scope to increase the yield from capital taxes as noted for example by the Commission on Taxation and Welfare.
Lots of mistakes were made and opportunities not taken. We needed a countercyclical budget that built our resilience to future shocks. We got the opposite. There is no obvious strategy to deal with our high rates of deprivation and child poverty. Minimum wage workers will be forced to wait at least three more years before we achieve a living wage. We continue to under-invest in key ingredients of long-run growth such as public R&D and education and we continue to distort the economy with tax breaks.
We need a new economic model that priorities productivity, good jobs, economic security and resilience. We’ll be waiting another year it seems.