Simon Harris will probably never keep the Irish Fiscal Advisory Council (Ifac) completely happy.
They are, after all, paid to be the “budget watchdog.” But its latest report has highlighted the choices and risks facing the new Minister for Finance in stark terms. How Harris responds is going to be important for the future of the Coalition.
Ifac, led by chairman Seamus Coffey, did not hold back in its report on the 2026 Budget, presented in October. The council, of course, was a long-standing critic of the budget policy of the previous Coalition, arguing that while it had put aside some of the excess, or windfall, corporate tax revenues, too much of it was going toward funding additional spending. This creates risks if there is a fall-off in these tax payments.
[ Coalition ‘budgeting like there’s no tomorrow’, warns fiscal watchdogOpens in new window ]
Its latest report doubles down on this criticism and argues that the 2026 Budget increases the risks further; it calculates that only 15 per cent of the windfall corporate tax revenues – those judged to be most volatile – are being put aside, compared to 30 per cent in the previous year’s package and 30 to 36 per cent in the previous three budgets. Ireland, in other words, is upping its bet on the corporate tax boom continuing.
RM Block
In the short-term, it might. Due to a new 15 per cent corporate tax rate coming into effect for the biggest companies in 2026, revenue is likely to rise next year by more than €2 billion on the Department of Finance estimates to close to €34 billion. There are clear long-term vulnerabilities from the policies of Donald Trump and the reliance on three or four big taxpayers, but for now the boom continues.
The report also goes in hard on the lack of publication to date of a medium-term financial framework, which is effectively a plan for the public finances over the next five years. This was promised in the Programme for Government but has yet to emerge. In a speech to the Cork Chamber of Commerce on Tuesday evening – and again going into Cabinet on Wednesday – Harris promised that a framework would be forthcoming.
It looks likely that it will emerge before Christmas, providing, for the first time, a detailed outlook for spending over the Government’s term and its consequences. The backdrop to this is a large rise in spending in recent years, due in part to a rising population, up from 4.74 million in 2016 to 5.46 million this year. State services and infrastructure have struggled to keep up.
If Irish households are so rich, why does it feel like an illusion?
On this week’s Inside Business, host Ciarán Hancock is joined in studio by senior lecturer in housing at TUD Dublin, Lorcan Sirr.The episode starts with some recent good news, that the net wealth of Irish households is nearly €1.3 trillion, or an average of €228,000 each.Sounds good but as Lorcan explains, this is an illusion. He argues that Ireland isn’t really a wealthy country in spite of what the statistics tell us. Lorcan also touches on the housing crisis in its many forms and goes through some possible solutions. And he does have some solutions. He also explains why he thinks judicial reviews of planning decisions haven’t caused the housing crisis. Produced by John Casey with JJ Vernon on sound.
How do we try to understand the difference in the world view between Ifac and the last two governments? Here are the key points.
The ‘real’ state of the national finances
The Government operates in a world where the budget is in surplus – revenue is greater than spending, in other words. The budget documents estimated a surplus of €10.2 billion this year and forecast an €8.1 billion surplus next year.
But the figures are, as we know, supported by so-called windfall tax revenues. These are the revenues calculated to be based on tax planning rather than on the actual economic activities of the multinationals in Ireland. This is more a “guesstimate” than a precise figure, but generally Ifac – and the Department of Finance itself- calculate that a bit more than half of all corporate tax is in this windfall category. If all this was subtracted from total tax revenues, then the Irish budget would not be in surplus – so Ifac and the Department argue there is an “underlying deficit.” On the Ifac calculations this deficit amounts to €7 billion this year and will double to €14 billion next year – and the Department of Finance’s own calculations are similar.
There are clear risks ahead which could hit corporate taxes, mainly from the agenda of Donald Trump. But there is also a legitimate question – how many years do tax revenues have to land here before you have to stop calling them windfall? And if there is a fall-off, how much of this excess tax might disappear? It is very hard to calibrate the real level of risk. But equally it is very clear that with corporate taxes now accounting for over 30 per cent of total tax revenue this exposure is real.
How to spend the windfall
Before he left, former minister for finance, Paschal Donohoe made two points in response to the criticism that the Government was spending too much of the windfall. One was that Ireland has huge cash needs for planned higher State investment and it was not reasonable to run a much larger headline budget surplus in this context. He also said the existing surplus and the amounts being put aside in two funds for the future provided significant leeway if trouble hit. This is true, particularly if the tax hit was cyclical and due to falling profits. But a big structural – or ongoing – fall in corporate tax due to investment leaving Ireland or tax structures being redrawn would still leave the public finances in trouble.
[ The Irish Times view on the IFAC report: budgeting like there is no tomorrowOpens in new window ]
Ifac in its report argues that the windfall revenues should not be relied upon even to fund the revised State investment programme given that it will have to continue for many years and should not be based on a potentially volatile revenue source. Spending the corporate windfall on investment is arguably less risky than using it to prop up day-to-day spending – because cuts here can be economically damaging. But having to slash investment is costly too and we are still paying the price of this happening after the financial crash.
It is all about balance. Using the corporate windfall to help fund State investment seems sensible – up to a point – given that investment projects are by their nature once off. Scoping this all out in a medium-term plan would cast significant light on this and allow levels of risk to be debated, as well as underlining the Ifac points about the longer-term costs of climate change and an ageing population.
Keeping to budgets
Here, Ifac has a point where the Government has no real answer, beyond the politics of spending pressures when there is money in the kitty. Budgets have run over in each successive years and the problem areas have moved beyond health – previously a serial offender – to go across a number of departments. Typically, the amounts budgeted for are increased during the year as pressures emerge, with significant supplementary budgets pushed through at the end of each year. As Ifac points out, spending in 2024 ended up €5.1 billion ahead of budget – there was no way ministers in the previous government were going to make difficult decisions ahead of a general election. For this year, the Government has already forecast a €3.6 billion overrun and it is more likely to end up close to €4 billion. These all accumulate, as the spending base rises. Ifac is also critical about how the Government fails to budget for this properly each year. Controlling this is a vital challenge.
The bottom line
All this raises big questions for Simon Harris. Producing a medium-term plan is one thing. Sticking to it will be another. Keeping departments on budget for 2026 – and restoring proper budgeting – will be a big job for Harris and Minister for Public Expenditure, Jack Chambers. And the 2027 budget will not be easy, with Ifac pointing out that already significant tax cuts will need to be accounted for – for example the full-year cost of the hospitality VAT cut – before anything new is counted in. Meanwhile, the Opposition will bang away at the issue of the cost-of-living crisis. The prize for Harris would be having strong finances in the latter half of the Government’s term, allowing investment projects to be progressed and relatively generous budgets. But it will be hard won and with the economy slowing expectations may have to be reined in. The golden decade for the Irish public finances driven by corporate tax receipts may slowly be drawing to a close, leaving tougher trade-offs ahead.
