Jim Power: Spending increases the big story in Budget 2026
The expenditure was spread generously across all departments, and the quick-fire way minister Jack Chambers rolled off the increases was impressive.
The days leading up to Budget 2026 were overshadowed by presidential politics.
It was probably just as well for the two parties of government, because despite the size of the budget package, workers will not benefit very much, if at all, from the offering. In fact, workers will experience a stealth tax increase due to the failure to widen the bands and credits, which has been a feature of recent budgets.
Given that this is the first budget in what is, in theory, a five-year electoral cycle, it is probably appropriate to focus attention on measures to help business and save the personal tax stuff for the second half of the electoral cycle.
However, the big story of the budget is the size of the spending package, with current spending budgeted to increase by 6.7%, and capital spending by 11.7%. The expenditure was spread generously across all departments, and the quick-fire way minister Chambers rolled off the increases was impressive.
Although measures introduced in the past couple of budgets addressing the cost-of-living crisis were flagged as once-off, people become accustomed and expect it to become the norm. There is a lesson here for Government expenditure also, in the sense that strong growth in expenditure becomes embedded in the system and is impossible to reverse, unless in extreme circumstances such as the global financial crash.
The budget package of €9.4bn was in line with the Summer Economic Statement, but the tax element was reduced by €150m to facilitate even higher expenditure. In framing the budget, a few factors were pertinent.
The Government has been getting stringent warnings from a variety of individuals and institutions about many things such as:
- the inappropriate pro-cyclical stance of fiscal policy and the potential fragility and vulnerability of the corporation tax base;
- the threats that US policies pose to Ireland’s economic model;
- the ongoing cost-of-living pressures, given that the average cost of living today is almost 24% higher than five years ago, with spiralling food prices now the key focus (people will also be facing sharply higher property tax, energy, and health insurance bills over the coming months);
- the promises made on the 9% VAT rate for the food component of the hospitality sector;
- the climate agenda, because despite the utterances and actions of Trump, it still represents a key threat to humanity that we must address more forcibly;
- the never-ending housing crisis;
- and the provision of support for the SME sector in general, but especially retail and hospitality.
The warnings about the pro-cyclical nature of fiscal policy were duly ignored.
The budget was described as a pro-enterprise budget, and in this context, the 9% VAT rate for the food component of the hospitality sector does qualify, despite its unpopularity in many circles and the fact that it will not apply until July 1 next year.
The reduced VAT rate for apartment development is needed; the changes made to the R&D tax credit system, with the promise of more to come, must be seen as positive, as have the limited other tax measures to help the SME sector.
The increase of 4.8% in the national minimum wage from €13.50 to €14.15 will put pressure on business costs. It is socially desirable, but there is a significant impact for SMEs in low-margin retail and hospitality.
From an overall taxation perspective, the budget was not terribly exciting. The real action, as always, was on the expenditure side. The upward pressure on government expenditure is incessant, with most, if not all, departments set to come in over budget this year.
Looking forward, demographic pressures on health spending, pensions, and care for older people will intensify dramatically over the coming years; a lot of money will be required to address Ireland’s environmental commitments and avoid massive fines; the State will have to become much more involved in the provision of housing; and defence spending will have to be ramped up in the current dangerous geo-political environment.
Facing these realities, it is incumbent on the government to place much more emphasis on ensuring value for money and efficiency.
Budget 2026, despite the overall size of the package, is unlikely to have a significant impact on economic activity in 2026. The social welfare increases will be soaked up by the various cost-of-living pressures that are still feeding through the system. Workers will not gain from a reduced tax burden.
Irish households are now facing higher property tax charges, higher energy prices, higher health insurance costs, and higher food prices. The measures to help the SME sector are predictably limited, and the hospitality sector will have to endure a 13.5% VAT rate for the first half of the year.
In addition, My Future Fund pension scheme, or in other words auto-enrolment, is due to commence on January 1, 2026, which will add to the costs of doing business.
Hopefully, housing will get some boost from the various measures introduced, but housing will remain the most significant challenge facing Ireland in 2026.
