The Government has framed its more cautious budgetary approach as a hedge against uncertainty. By uncertainty, it means US tariffs.
“The certainties that have underpinned Ireland’s transformation are now being called into question,” Minister for Finance Paschal Donohoe said in his Budget 2026 speech.
But tariffs are having only a minimal impact on the Irish economy. They are expected to result in a modest 1 per cent drag on the economy over the medium term.
The real uncertainty bearing down on the State is the runaway train that is public expenditure.
RM Block
This has been rising at an unsustainable rate for several years, driven by demographic pressures (a bigger population) and rising prices.
Without record corporate tax receipts, the Government would be facing a €7 billion budget deficit this year and might easily be announcing tax hikes and/or spending cuts.
The Government’s now-jettisoned 5 per cent spending rule reflected the long-run growth potential of the Irish economy (3 per cent) and a long-run inflation average (2 per cent). Both add up to 5 per cent.
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But that’s long gone. Government spending has been increasing by an average of 9 per cent per year since 2019.
The Irish Fiscal Advisory Council (Ifac) thinks it could increase by 10 per cent this year when all the overruns (predicted to be in the region of €4 billion) are included.
What did the Government do on VAT?
Perhaps the most controversial aspect of this year’s budget is the decision to reduce VAT on restaurants and food-serving businesses to 9 per cent.
It’s controversial because the move is expensive (€232 million next year – when it kicks in from July 1st – and €681 for a full year thereafter).
It also crowds out the potential for any changes to income tax bands and credits; is unlikely to be passed on to consumers; and will also go to the big fast-food franchises such as McDonald’s, which don’t need it.
The aim was to shore up struggling hospitality small and medium enterprises (SMEs), which have been hit by a succession of cost hikes linked to changes in employment law and higher energy prices.
Attempts to make the measure more targeted have proved elusive. “The cut in VAT is a blunt, expensive and unnecessary change, and the only worker to benefit is Ronald McDonald,” said Owen Reidy, general secretary of the Irish Congress of Trade Unions (Ictu).
A report last week also cautioned that moving the VAT rate up and down like this (it has been changed five times since 2011) results in permanent price hikes. The Government had, however, tied itself in to the move by promising it in its Programme for Government.
What’s happening with income tax?
Because of VAT cuts (not just in hospitality), indexing or inflation-proofing the income tax system has effectively been crowded out and discarded. That means the effective rate of income tax for workers here is going up.
Some countries automatically index their tax system – moving credits and bands in tandem with inflation. We leave it within the gift of the Minister – presumably it can be spun as a tax giveaway.
The Government may have been swayed by the high savings rates here, which could be interpreted as meaning households are well off.
[ Anti-populist budget offers little for middle income earnersOpens in new window ]
But some argue it reflects the high cost of housing and the need for people to build up big deposits to get on the property ladder.
While the threshold for paying the higher 40 per cent rate of income tax was lifted to €44,000 for a single person, it is still viewed as onerous on middle-income earners, particularly when combined with the universal social charge (USC).
What did the Government announce on housing?
Donohoe said he would reduce VAT on the sale of completed apartments to 9 per cent from 13.5 per cent.
The reduction would help address the “viability gap” in apartment construction, he said.
The Government’s Housing for All plan targets the provision of an additional 300,000 units by 2030, starting with 41,000 units this year.
But a slowdown in construction, particularly apartment construction, puts a big question mark over these targets.
The VAT cut on new-build apartments combined with changes to apartment design standards and the State’s rent pressure zone (RPZ) system are aimed at bolstering supply.
Taoiseach Micheál Martin hinted earlier this year that the Government was exploring possible tax breaks for all private housing developers but Donohoe came out strongly against the idea of Celtic Tiger-style tax breaks which he said had done more “harm” than good.
What a difference a year makes
Last year the government increased the tax bands and credits, announced €2 billion in one-off cost-of-living measures, and handed parents, even well-off parents, a double child benefit payment. Had the election anything to do with that?
This year the budget looks and feels a lot different, with the emphasis on the State’s infrastructure challenge. Capital spending will grow by 12 per cent to a record €19 billion in 2026 to help drive the National Development Plan.
But Ifac, the Central Bank and the Economic and Social Research Institute (ESRI) claim the Government’s overall spending package is still too large and that it needs to prioritise.
