One of the most dangerous errors in behavioural economics is extrapolation: a mental shortcut to assume the latest observation will continue indefinitely. The lead up to budgets in Ireland seems to have been near identical for many years: record revenue that provides a long wishlist where everything seems doable. Yet it is only five years since the tail end of Covid hugely influenced Budget 2022, and wishlists did not exist in the years that spanned from 2007 to 2014.
That helps to frame the choices facing Government slightly differently. It isn’t all about this year’s €8.5 billion package and the choices within it, which at roughly 2.5 per cent of national income looks to be at the generous end of a reasonable range. This additional spending is arguably justifiable because higher inflation and interest rates will likely slow domestic activity over the next 12 months. What’s equally important is that we use our run of good fortune wisely to save for tomorrow, while continuing to encourage foreign capital to invest here.
Ireland’s strong position is the envy of Europe. The domestic economy continues to expand at a decent pace, household debt has more than halved as a share of disposable income since the banking crisis, Ireland’s financial system has been repaired and the country has run a primary budget surplus (ie after obligatory interest payments) every year – except for Covid – since 2014. It is not easy to run budget surpluses: the euro area as a bloc has never recorded one since the advent of the single currency and only Luxembourg has a better individual record than Ireland.
Despite our economic good health, immediate threats exist. Largely due to the conflict in the Middle East, the European Central Bank (ECB) recently hiked its deposit rate to 2.5 per cent. Market pricing suggests at least another increase to a range of 2.75-3 per cent by Christmas. Most important to Ireland is what happens in the US: our economic cycles are now perfectly synchronised. Ten-year interest rates (bond yields) pushed above 5 per cent recently, for the first time since 2006. One of the reasons for this is that the US economy keeps on delivering, driven by the sheer scale of AI-related investment. That’s double-edged for Ireland: our multinational sector, so tightly wound into the US economy, benefits from that strength. But a US economy running hot enough to need higher interest rates has the potential, if it turns, to hit Ireland hard.
RM Block
That isn’t a forecast of an imminent downturn. It would probably take a much sharper, faster move in rates than markets expect to impinge on the Irish economy. But the upward direction of energy costs and interest rates – of course also linked by geopolitics – is the biggest risk we have faced since both those variables rose sharply in 2021 and 2022. The obvious additional domestic risk is that a significant portion of Government revenue comes from a small number of very large companies, albeit it is often overlooked that the top 10 payers have shifted a lot over the last decade and year-to-year.
That’s really the argument for Budget 2027: use the room we have while building the capacity to cope with whatever comes next. We created those buffers in advance of Covid, through the years of sensible budgetary management. That allowed us to act decisively when it mattered, with the backstop of the ECB’s balance sheet.
Beyond the headline numbers, three policy areas stand out to shape Ireland’s competitiveness for the next decade, not just the next 12 months.
The first is capital for growing businesses. Ireland has cash deposits in excess of €160 billion, pension assets of €130 billion or more and significant corporate capital, yet making that capital available to growing businesses is more of a challenge. Funding is one of the most frequently cited difficulties entrepreneurs face; many find themselves constrained by capital even when a clear opportunity is in front of them. Encouraging entrepreneurs to reinvest more of the proceeds from a business sale into other growing Irish companies, alongside a greater role for pension and corporate capital in backing indigenous enterprise, would help close that gap. Alongside more capital, there’s a case for more coherence: EIIS, Angel Investor Relief, Entrepreneur Relief and KEEP are each valuable, but a founder often has to piece them together scheme by scheme. Looking at them from the business owner’s perspective, as a single framework that follows a company from start-up through scaling to succession, would make simplicity itself a competitive advantage.
‘We need continued political drive for the next wave of energy, water and transport projects to be delivered’
— Rossa White, chief economist at EY Ireland
The second is research and development (R&D). The rules underpinning our R&D tax credit date from 2004 and the way companies organise research, sharing it across group companies and with universities, has moved on hugely since then. Ireland doesn’t count R&D spend carried out by a related company within the same multinational group, whereas Belgium, France, the UK and Spain already do. For a country competing hard to keep senior R&D decision-making onshore, there’s an opportunity here to level the playing field, rather than lead it. The same is true of the paperwork: a credit that took less than a page to claim in 2004 now runs to nine, enough of a burden that some SMEs with Enterprise Ireland grants choose not to claim it at all. A change here would be a real boon for businesses.
The third is infrastructure, and here the constraint has genuinely changed. For most of the past century, money was the limiting factor on what Ireland could build. Even if economic circumstances change, we must safeguard as much as possible the €275 billion committed under the National Development Plan. We need continued political drive for the next wave of energy, water and transport projects to be delivered to ensure that Ireland has the productive capacity to improve living standards for the long term. Credit is due for recent progress: last year capital spending reached its highest share of total government expenditure since 2007.
Ireland has budgetary choices when many of our peers have few. The test of this budget, and the ones to follow, is whether we use that position to make sure we still have choices the next time the world throws a shock our way.
EY Ireland brings you expert industry insights and tax guidance on what Budget 2027 means for your business, your people and your growth plans. Find analysis, sector perspectives and practical guidance you need today, tomorrow and beyond at eybudget.ie
