Last October was the pre-election giveaway. This year comes the reckoning. This looks like a very different kind of budget and is quite likely a politically explosive one, particularly after the Minister for Finance confirmed on Friday that there would be no personal tax cuts. Here are the six keys to interpreting Budget 2026.
1. The central problem is that the amount of money being fought over does not meet a lot of the Government’s political goals. Budget ministers Paschal Donohoe and Jack Chambers are trying to tighten things up in the first year of the Coalition’s term after an overly-flaithiúlach 2025 pre-election package and a few years of runaway spending growth. A big hike in vital infrastructure spending will be a key budget theme but this leaves less for additional spending on services in areas like health and education. The Ministers have said there will be no once-off cost of living payments this year and also no room for general personal tax cuts.
This politically unattractive cocktail will surely lead to tensions as the budget is finalised this weekend. That said, if anyone mentions an “ austerity” budget (and they will), this is nonsense. Austerity was demonstrated the 2011 budget, for example, when total State spending fell by more than 5 per cent. Next year, current spending is budgeted to rise by 6.5 per cent. It is a reflection of the out-of-control nature of expenditure in many departments over recent years that this is judged as somehow harsh. More experienced insiders worry that this indicates the Republic is still not facing up to the reality of the economic threats.
2. With sharper trade-offs this year, the key issue will be who gets what. The planned budget spending increase of €7.9 billion is simply not enough to hike welfare rates by the amount sought by social protection minister Dara Calleary while also meeting promises of cheaper childcare, lower pupil-teacher ratios, measures to address child poverty, shorter queues in healthcare and so on. What areas are chosen for extra cash will tell a lot. What is not chosen will tell even more.
3. In tax, the choices are just as politically toxic. The VAT cut on hospitality will proceed in some form and possibly the VAT rate on new apartments will be cut, too. This sharply reduced room for personal tax measures and, on Friday Donohoe confirmed that there will be no income tax and USC package next Tuesday.
Expect specific measures like a hike in the renters’ tax credit, but the big call on whether to adjust the income tax system has been made. In the €1.5 billion tax package, there was just not enough wriggle room to deliver a meaningful package of personal tax cuts, which would involve widening tax bands and increasing credits to match wage inflation. Donohoe said that introducing personal tax cuts in addition to the VAT reduction would put the public finances at risk. His focus, he said, was on jobs.
The “solemn commitment” to cut hospitality VAT, as Fine Gael Tánaiste Simon Harris put it, has come back to bite the Coalition. The political issue is that the Coalition will be seen to be helping businesses rather than households.
4. Government budget documents – and media analysis – tend to major on sample members of the public and how they are affected: Tom and Nuala the retired couple; Arthur and Marie with two kids; Pat the single civil servant and so on. These are not going to look too pretty this year with the absence of a personal tax package and no cost-of-living payments, such as energy credits.
Last year, tax cuts and one-off payments added up to provide significant gains – more than €1,000 annually for many single people, and more than €2,000 for many families with children and €2,500-plus in many cases. Having made the tough decision on personal tax, the Government will try to give something back – for example, by extra childcare supports and some increase in welfare rates and pensions. But the cash gains to households in Budget 2026 be a fraction of last October’s package. Expect much talk about the hardship of the “squeezed middle”, and outrage from the Opposition. Donohoe insists that protecting the public finances and job creation are the vital goals this year, but he will know that politically this is a hard sell.
5. A perennial political problem is that the budget is expected to solve all ills. A key issue each year, as American political scientist Aaron Wildavsky has put it, is that it is essentially an incremental exercise. The vast bulk of money rolls over from one year to another and departments argue over who gets the bit extra that is on the table. The amount left to actually do new things in any one budget is limited. It cannot solve all ills. The real work of the budget goes on throughout the year, actually spending the money and trying to ensure goals are met.
6. Is the budget taking risks with the public finances? There are two key issues here. First, the budget will inject more cash into an economy already moving at full steam, causing more pressure in areas like housing and risking overheating. And second, that it will leave the State increasingly vulnerable to economic shocks, such as those that might appear from US president Donald Trump’s remaking of international trade, or an uncertain geopolitical world. These could hit the corporate tax base on which we increasingly rely. And the latest exchequer returns hint at some softness in income tax in September.
The prudence argument was set out in the Dáil recently in an interesting exchange between Labour finance spokesman Ged Nash and Minister for Finance Paschal Donohoe. Nash said that “there is a certain faint whiff of 2008 around the place” and that the budgetary oversight committee had heard warnings from the ESRI, Fiscal Council and the Central Bank of Ireland “and me” that “we cannot keep spending and cutting taxes and expect good outcomes”. The Government seemed determined to keep narrowing the tax base – this time via the hospitality VAT cut – rather than widening it, he said and had no clear rules to govern spending.
Donohoe responded that the Government would again budget for a surplus of revenue over spending next year, that the State’s debt burden was falling and that significant amounts were being put away in two funds that will help support the public finances in future. He promised a medium-term plan for the public finances later this year.
The Republic has some of the healthiest public finances in the EU – but that does not mean they are not vulnerable, as more and more tax comes from a small group of companies and a few better-off taxpayers.
Politics dictates, however, that prudence in this State only goes so far.
