Budget 2026: A complex and challenging landscape
Leading economic analyst and commentator Jim Power provides his thoughts ahead of Budget 2026.
The budget to be delivered on 7 October is likely to be more complex and challenging than any we have seen in recent years. Previous budgets were shaped by the Covid-19 crisis, the December 2024 general election, and the cost-of-living emergency. In those cases, the government’s priorities were relatively clear. This time, however, the situation is more nuanced.
On the surface, the economy appears to be performing well, with strong exports, a healthy labour market, and robust public finances. However, consumer dynamics and the general business environment – particularly for SMEs – are more difficult. The retail and food services sectors are under notable pressure.
Meanwhile, the two ministers responsible for delivering the budget are receiving stern warnings from the Irish Fiscal Advisory Council (IFAC), the Central Bank, and the ESRI that the proposed €9.4 billion budget-day package may be excessive. These concerns are based on two key issues: first, that the package may be too pro-cyclical and risk overheating the economy; and second, that the tax base underpinning this spending may be fragile.
Government spending has been rising sharply for some time, and this year most spending areas are expected to exceed budgeted allocations. The concern is that this growth is being funded by a tax base that may not be sustainable. The Department of Finance has expressed particular concern that a significant portion of corporation tax receipts could be transitory. Ireland’s experience in the lead-up to 2008, when current spending spiralled out of control on the back of buoyant construction and property-related taxes, serves as a cautionary tale. When that bubble burst, the country was left with high expenditure levels and significantly reduced tax revenues.
Today, the main external risk stems from uncertainty surrounding President Trump’s tariffs, casting a shadow over the global economy. For Ireland, the stakes are high, given our heavy reliance on US multinational investment, especially in the pharmaceutical sector. This concentration risk underscores the vulnerability of both the economy and public finances to unpredictable US policy decisions.
Budget breakdown and key considerations
The Department of Finance’s Summer Economic Statement outlines a €9.4 billion budget package, comprising a €1.5 billion net tax package and a €7.9 billion expenditure package. If the Government proceeds with the promised 9% VAT rate for the food element of the hospitality sector, this could consume around €600 million of the tax package, or more if extended to other parts of the tourism sector, leaving limited scope for personal tax concessions.
The Government remains divided on how to proceed. A compromise may be reached, with the 9% VAT rate potentially introduced from 1 July 2026, a politically viable option.
The expenditure package includes a €5.9 billion increase in current spending (almost 75% of the total) and a €2 billion increase in capital spending. Social welfare accounts for 22% of total spending, health for 21%, and education for 10%. These areas will dominate budget decisions, though other departments will also require attention. In the current geopolitical climate, defence spending decisions will be closely watched. Housing measures are expected to feature prominently, given the scale of the housing crisis, and climate-related initiatives will also be necessary.
Support for the SME sector, particularly retail and hospitality, will be a key area to watch. Household spending power remains under pressure due to the lingering effects of elevated inflation. The average cost of living is now almost 24% higher than five years ago, with food prices a particular concern. While ministers have stated that there will be no one-off cost-of-living packages, this may prove politically difficult to maintain.
Looking ahead
Budget 2026 will be a delicate balancing act, set against a backdrop of scarce and potentially fragile resources.
Our Budget 2026 webinar, featuring leading economic analyst and commentator Jim Power along with a panel of Crowe Ireland experts moderated by tax partner Claire Davey, is now available to view on demand. Click here to to find out more about what Budget 2026 means for business owners across all sectors.