The politics and economics of Budget 2026: Rewinding the week that was

The trouble with independent advisors is that they provide independent advice.

The Fiscal Advisory Council was established in June 2011 to advise Ireland on its budgetary policy. Within months of its establishment, it caused quite a kerfuffle when it questioned whether the Government could achieve its growth target of 1.3 per cent for 2012. It noted that most forecasters – including the IMF – said growth would be less than half that level.

The warning did not go down well in official circles at the time, as Ireland navigated the perilous world of banks, bonds and bailouts. But it showed that the budgetary watchdog was not afraid of giving contrary advice. 

Since then, the council has continued to show its independence, regularly chastising the Government for what it perceives as fiscal imprudence.

Its pre-Budget submission this year is in keeping with that vein. Entitled “No map for the road ahead”, it argues forcibly that the budget-day package should be smaller than the €9.4 billion that is currently planned.

“The Government is yet to set any limit on what is sustainable for the public finances,” according to the Ifac submission. “Without a rule or limit, budgetary policy will be made in a year-to-year fashion.”

It noted, tellingly, that the Government has yet to submit a revised medium-term plan, despite having committed to doing so alongside the Summer Economic Statement. (This point was echoed by the economist Colm McCarthy in his column for The Currency on Friday.)

The Fiscal Advisory Council is not the only one trying to dismantle the Government’s spending plans. 

The Central Bank says the proposed Budget package of €9.4 billion of additional spending is “too large” and “unnecessary”.

The bank said the Government must cut back on its infrastructure budget or raise taxes to sustain its current spending. It said the “sharp increase” in Government expenditure would impact the public finances and that there would be a larger underlying deficit than had been expected this year when one-off factors are excluded.

The Economic and Social Research Institute (ESRI), meanwhile, had a similar view, arguing that the Government’s fiscal stance was adding to demand pressures at the wrong time in the economic cycle.

“In our assessment, we suggest that the fiscal stance needs to be tightened in Budget 2026, in part to avoid overheating,” according to the ESRI.

Combined, it is quite a volume of independent advice. 

And again this year, it will be largely ignored by the Government. 

I put the critique to the Minister for Finance, Paschal Donohoe, for our annual pre-Budget interview last weekend. 

He was his usual diplomatic self, accepting the criticism that spending had grown too high in previous years, but arguing that this budget will moderate it, pointing specifically to the phasing out of the more than €2 billion in temporary cost-of-living supports allocated in previous years.

“That is a very comprehensive effort from the Government to moderate the current spending growth that we’ve had in recent years, and it’s going to be a very difficult part of the budget,” the minister said.

Not surprisingly, Donohoe also pointed to the wider Exchequer picture. “We are now approaching another year of running a very large budget surplus. We will have constant demands on us to spend more. And if you look at the base in this year, it will be a significant reduction in spending growth,” he said.

The issue of spending is key here. Last October, the Government budgeted for a €3 billion increase in spending. In reality, the figure is likely to reach €7.6 billion this year due to overruns in certain departments, such as health, education, and transport. 

In the year to September, current spending has grown by six per cent. In contrast, the figures announced in last year’s Budget imply current spending growth of 1.4 per cent for this year.

Quite simply, many big-spending government departments are struggling to live within their means. 

Thankfully, for the Government and pretty much everyone else, these overruns are being masked by the huge growth in corporation tax being deposited by a very small number of multinational giants. It is the reason Donohoe and public expenditure minister Jack Chambers can point to surpluses in the face of the criticism of their budgetary policy. 

But once you factor in a 19 per cent increase in capital spending so far this year, and exclude the funds collected into the early part of this year as a result of the 2024 Apple court ruling, the Exchequer has recorded an underlying deficit of €1.9 billion so far this year.

This is a deterioration of €6.9 billion on the same period last year, but €6.1 billion of this comes from new contributions to the Future Ireland Fund and to the Infrastructure, Climate and Nature Funds, according to the Department of Finance. So, the actual worsening of the underlying deficit so far this year has been around €800 million.

There is little reason, even in a world of Trump, tariffs, and trade tensions, to believe there will be a fall-off in the tax contribution of multinationals in the short term. This won’t happen next year, according to the Government’s budget white paper published on Saturday, which forecasts another €2 billion increase in the corporation tax take next year.

This is related to the partial implementation of the 2021 OECD-led agreement on multinational taxation. On the one hand, the first top-up taxes from multinationals liable to the new internationally-agreed 15 per cent minimum rate under Pillar Two of the OECD deal are falling due in 2026, as previously detailed.

On the other hand, Pillar One negotiations targeting the redirection of a portion of those firms’ tax payments to their market countries have stalled. The Department of Finance previously estimated this would cost the Exchequer €2 billion a year and has routinely pushed back this shortfall through successive budget forecasts as its implementation failed to occur. The figure is likely out of date, and officials never gave a clear response when Thomas asked how they factored the net effects of Pillars One and Two in their calculations.

However, it is unrealistic to expect that the multinational-driven tax bonanza will continue indefinitely either. At some point, something has to give. On Friday, Donohoe mentioned a “challenging” conclusion to Pillar One talks. This is a hint at an upcoming collapse in multilateral negotiations, followed by a return to the free-for-all where individual countries like France and Italy revive paused plans for national digital services taxes, eating into the profits taxable in Ireland.

Budgets are about expectation management, and they are also about a time and place.

Last year’s Budget was framed against an imminent election. It was, by any definition, an election budget on steroids. But, by allocating significant money to future-facing funds and long-term infrastructure projects, it also allows the Government room to argue some element of fiscal prudence.

This year’s budget marks the start of a new electoral cycle. And given the international headwinds, most ministers have been at pains to dampen expectations. Few people are expecting much from next week – bar the hospitality sector, who, after years of strenuous lobbying, are set to receive a cut to Vat for reasons that are not economically clear. The proposal, which will gobble up almost half of the overall €1.5 billion tax package, is a win for perseverance as opposed to common sense.

It also seems likely that there will be some class of tax breaks for developers and builders, although it might not be branded as such.

Overall, the dominant theme of Budget 2026 will be about infrastructure and long-term investment. This was something Donohoe returned to again and again in our interview last weekend.

“The key focus of this budget is going to be about investment, and it is going to be about how we can support jobs and invest in our country’s future. And we are making good progress on delivering that,” he said.

The Government’s message of moderation and long-term investment chimes with that of its independent advisors, who continue to plead for restraint. Both sides cannot be right. The difference will only become clear when the wind shifts and the economy slows.

I caught up with Sheena Peirse, the newly installed chief executive of Mediahuis Ireland, who talked about subscriptions, local news, and the future of print. 

Her career has been built in digital — first in the UK, where she held senior roles at ITV and Channel 4 during the years broadcasters were scrambling to adapt to online platforms, and later in Dublin, where she was recruited by the publishers of the Irish Independent as digital director before moving up to chief customer officer.

“I have no history in newspapers, so I think it says something that I am digital first,” she says. “I’ve always worked in digital within traditional media. That’s where all the growth is coming from.”

Michael Kearney has built and sold companies such as Snap Printing and Home Instead, coached on the edge of elite sport, mentored national players for life beyond the jersey, and helped steer Irish rugby through one of its most successful eras. He was our guest on the podcast series Sports Matters, which is sponsored by the law firm Whitney Moore. 

Louise Murray, the head of production at London-based TV and film producer Minnow Films, spoke to Michael about Ireland’s “powerhouse” audiovisual industry, the rise of AI, and bringing Bill Nighy to Dingle.

By borrowing against its Glanbia shares instead of selling them at the time of its de-merger from the PLC in 2022, the farmers’ co-op now known as Tirlán has made a multi-million-euro gain. Thomas explained how Tirlán gamed Glanbia’s share price volatility.

The Currency’s coverage of Budget 2026 is supported by Baker Tilly Ireland.