Behind firmly closed doors in the complex of buildings that house the offices of the Taoiseach, the Tánaiste, the Minister for Finance and the Minister for Public Expenditure, Ministers have been busy.
A series of sometimes fraught meetings between Ministers and senior officials has been taking place all week as Minister for Finance Paschal Donohoe and Minister for Public Expenditure Jack Chambers seek to finalise next week’s Budget, the first of the Government’s second term.
There’s still work to be done this weekend, in advance of Tuesday’s announcements
It has not been an easy process. It never is, of course, but after three years of giveaway budgets – especially last year’s pre-election edition – the determination of Donohoe and Chambers to limit spending growth means that this is going to be shock to the system.
READ MORE
According to several people involved in the wider process, Ministers have been taken aback at spending allocations they believe will store up political problems for them.
One Cabinet minister was reported to be pacing the grounds of Leinster House, calling backbenchers and asking them to put on pressure to increase his number.
Some senior officials who spoke to The Irish Times on condition of anonymity after budget meetings were critical of the process.
“I’m not sure they’ve done the work. All this talk about efficiencies ... the homework hasn’t been done,” one official said. “Nobody is politically proofing this. They’re going to create a lot of problems.”
Another source spoke of the dangers of “landmines”, whereby a little-noticed budget measure can suddenly explode underneath the Government in the days and hours after its announcement.
At the Oireachtas health committee on Wednesday, Minister for Health Jennifer Carroll-MacNeill seemed to be preparing the ground for limited increases in her budget. Citing the large increases in health spending since 2020 – the health budget has increased by 35 per cent to €26 billion in that time – Carroll MacNeill said the growth at this rate “cannot continue”.
The Department of Education’s budget has been a particular battlefield. The Department of Public Expenditure wants the cost of this year’s budget overruns – expected to be huge, sources say – to be paid out of the increased allocation for next year.
The Department of Education is strongly resisting this, insisting that the cost of providing services this year is the cost of providing services this year – and that any increase in its budget should come on top of that.
On this seemingly arcane accounting point – Government accounting often appears not designed to provide clarity, but rather the reverse – rests billions of euro.
“There’s a very serious problem in education all right,” said one person familiar with the exchanges.
It will have to be solved this weekend, or by Monday at the latest. Budgets always go down to the wire, but they always get done. No government has failed to get a budget done since 1982.
[ Budget 2026: No changes to personal income tax plannedOpens in new window ]
So what should we look out for next week?
The budget ministers have already indicated the size of the budget day package – €9.4 billion, split between spending increases of €7.9 billion and a tax reduction package of €1.5 billion.
This will continue the trend of recent years of most of the available money going on spending increases, rather than tax reductions. In addition, they have repeatedly pledged the end of the repeated “one-off” giveaways of recent years.
Despite the gargantuan sums, however, the room for manoeuvre is limited. One of the chief reasons for that is that the cost of just standing still – providing the same public services next year as the Government did this year – is significant.
In Government parlance, this is known as the “existing level of services”, or ELS. The cost of maintaining the ELS next year has not been set yet, but last year it was €3.4 billion. It will be more this year. That takes up a goodly chunk of the €7.9 billion allocated for spending increases.
Then there are welfare increases. The tax strategy group has estimated that every €1 in welfare increases costs the Exchequer about €140 million.
One lobby group, Social Justice Ireland, is advocating for welfare increases of €25 to the core rates – it won’t be anywhere near that, but whatever the Government does on welfare rates (including pensions, remember) will be expensive.
And what about the other side of the budget, on tax? It’s even tighter here.
The Government is committed to reducing VAT on hospitality venues from 13.5 per cent to 9 per cent – not to bring prices down but to give businesses a cash boost. Its introduction is likely to be delayed to midyear in order to cut the cost in 2026. (And 2027 will be twice as expensive, but that’s next year’s problem.)
We can expect the lower rate of VAT on gas and electricity to be continued as well, while Government sources say that VAT on the sale of new apartments is also likely to be reduced to 9 per cent. Mortgage interest relief is tipped to be retained, as is the renters’ tax credit, which could be increased.
There will be no room, however, for a personal tax package. In recent years, adjusting the bands and credits has meant that most workers were left more than €1,000 better off. But sources say that’s not going to happen this time.
“The VAT is so expensive that there’s no room for anything else,” says one official involved in the process. “Paschal is holding the line.”
Combined with the elimination of the one-off payments, the lack of a tax package is going to make this budget feel a lot different from recent budgets.
It won’t be anything like the austerity budgets of the 2008-2014 period; spending is increasing and taxes might not be coming down, but they’re not going up.
But for many people, it will seem different from recent years.
It will feel like things aren’t getting easier. This is the main point of exposure for the Government and it will take nimble politics to get around it.
The context
Though there will be intense focus on the spending and taxation decisions announced next Tuesday, the €9.4 billion budget day package represents only a small fraction of what the Government actually spends every year.
In total this year, it will cost around €120 billion to run the country, divided between expenditure voted by the Oireachtas (€105 billion) and non-voted expenditure – that’s spending for which the authorisation lies in non-annually voted legislation, and includes things such as the interest on the national debt and Ireland’s EU contributions.
Voted expenditure is divided between public sector pay and pensions (€33 billion), capital spending (€15 billion) and goods, services and welfare payments of €58 billion.
Among the departments, the biggest spenders are social welfare (€27 billion), health (€26 billion) and education (€12 billion).
All this is paid for by tax revenues and other charges for government services (known as “appropriations-in-aid”), which this year will run in advance of the total spending bills, generating a significant surplus, some of which is diverted into the State’s long-term savings funds.
The three big taxes are corporation tax (€34 billion), income tax (€36 billion) and VAT (€23 billion). Excise duty (€7 billion), stamp duty (€1.7 billion), capital gains tax (€1.6 billion) and other taxes make up the rest.
Ireland is very unusual in the proportion of its revenue raised by corporation tax.
The huge increase in government spending over the last decade – it has grown from about €75 billion in 2015 to €120 this year, an increase of 45 per cent – has been underpinned not just by economic growth, but by an unprecedented surge in corporation tax receipts.
If that were to stall, everything would change.
