I thank the Leas-Chathaoirleach, the staff, and members of the committee for the invitation to appear before them today to give our assessment of budget 2026. A lot has already been said about budget 2026 but it is worth emphasising some key points. One of the first rules of government is the sound management of public finances. As it happens, budget 2026 is clearly expansionary and inflationary. The net spending increase, that is, the gross spending net of tax changes of €9.4 billion, is well above the 4% to 5% sustainable growth rate of the economy. The budget will add to growth and to inflation in 2026.
The budget is also taking place in the context of an economy that is now three years into an economic boom. We are close to record employment rates, with a projected 500,000 extra in work between the end of lockdown and the end of 2026, and with evident labour and infrastructure shortages across the economy. While real household disposable incomes fell in 2022 and 2023 on account of the elevated price inflation, real incomes subsequently increased in 2024 and 2025. Growth is slowing but we are at, or near, full employment. We can legitimately debate whether the economy is overheating but it is certainly experiencing capacity constraints.
If we put the facts together, it is abundantly clear that the budget is firmly pro-cyclical and that the fiscal stance is too loose. We are channelling the mid-2000s with boom-time budgeting in a boom-time economy. It is true that we have a projected surplus in the public finances next year of close to €5 billion but, unfortunately, the recent headline surpluses seemed to be engendering a troubling sense of complacency about the longer term fiscal squeeze that an ageing society and other pressures will bring. The warnings of the Commission on Taxation and Welfare about the sustainability of the tax base are clearly being ignored.
The truth is that the only thing differentiating Ireland from the deficits and austerity facing France, the United Kingdom and other western economies is the windfall corporation tax receipts emanating from a tiny group of US multinationals. These companies are exploiting Ireland's tax regime to reduce their global corporation tax payments, with Ireland benefiting as a side-effect. These companies can very easily change their tax arrangements and Ireland's corporation tax yield is, therefore, extremely vulnerable to policy shifts in the United States, to downturns in the fortunes of individual companies and to boardroom decisions to move intellectual property, IP, assets out of Ireland for whatever reason. If these receipts were to vanish, we would be left with a yawning deficit in the public finances. We should not be running any kind of deficit when the economy is at or near capacity.
While the winding down of these at least €15 billion in tax receipts annually may seem a low probability event to some, it is clearly a high-risk strategy to rely on these taxes. NERI does not believe these receipts are likely to decline in 2026. In fact, we believe they will increase. Even so, we need to change our strategy so that, over the next few years, all of the windfall corporation taxes are being saved into twin savings and investment funds and not just a portion of them. The 2024 summer economic statement noted in its foreword that the "Government cannot, and will not, use these transitory receipts to fund permanent increases in public expenditure." It is not clear what has happened in the interim. We will need to diversify our sources of revenue. Government revenue, excluding corporation taxes, is well below that of comparable European countries as a percentage of national income.
Notwithstanding this concern, many of the policy directions announced in the budget are broadly positive, moving from universal one-off payments to targeted income supports was a necessary shift. However, much more needs to be done to ensure adequacy of income for vulnerable households amidst an ongoing cost-of-living crisis for the bottom half of the income distribution. The Commission on Taxation and Welfare made a number of important proposals around adequacy benchmarking, a second tier of child benefit, and income tapering. Unfortunately, there has been little progress in this regard.
Higher spending on infrastructure is really welcome, given our severe capacity constraints in energy, water, transport and housing. We have a massive need for housing and infrastructure and these twin crises must be addressed with decisiveness. In theory, we are now moving to a somewhat appropriate level of annual public investment. Unfortunately, it is unclear whether the increased budget allocation will even be spent. We simply do not have the domestic construction workers to quickly ramp up housing supply while also meeting our infrastructure and retrofitting objectives. Is there a plan to divert workers from elsewhere or to improve productivity through regulatory or other reforms? The reality is that we will need to import the relevant workers if we are to see a short-term ramp up in supply.
While far from an austerity budget, it was clearly not a populist one. Effective tax rates will increase, albeit very marginally, for most workers. However, context is important. We have already noted that Ireland’s ratio of Government revenue to economic output is well below the average for the European Union once we exclude footloose corporation tax receipts. This does not mean that income tax paid by workers ought or ought not be indexed for inflation or wage growth. However, it does mean that some taxes will need to increase over the medium term. In this context, the decision to cut taxes for the hospitality sector at a time of full employment – the lowest paying and least productive sector in the economy, no less – is a particularly bizarre one. Wasting €700 million annually on a policy that will generate little or no new jobs is a breathtaking waste of resources. The opportunity cost is enormous. We could have hired more than 11,000 nurses, made public transport free or taken 50,000 children out of poverty with that money. Alternatively, we could have just saved the money in order to reduce the need for tax increases in the future. Unfortunately, the evidence-free tax breaks for the loudest business lobby follow a well-worn pattern of responding to complex policy issues with a blunt, ineffective and regressive tool. This measure will do precisely nothing to promote economic productivity. Indeed, it will have the opposite effect. The needed direction of tax reform is to move in precisely the opposite direction through a medium-term project of generating billions in additional revenue via the gradual winding down of the existing tax breaks and not making the existing ones more generous or adding new ones. There is also significant scope to increase the tax yield from capital, property and assets, as noted, for example, by the Commission on Taxation and Welfare.
Many mistakes were made and good opportunities were not taken on budget day. We needed a countercyclical budget that reinforced our resilience to future shocks. We got the opposite. This is not the time to stimulate the economy and our fiscal stance is highly irresponsible. In addition, there is no obvious strategy to deal with our high rates of deprivation and child poverty. Half of households find it difficult to make ends meet, which is a very high proportion by EU standards, including 75% of those at risk of poverty. As a result, we need joined-up thinking around boosting wages through collective bargaining and removing barriers to work, earnings-linked adequacy benchmarking for all welfare payments, the expansion of universal basic services and reduced living costs, for example, through pricing reforms and renewable investment in the energy sector.
We have other concerns. Minimum wage workers will be forced to wait at least three more years before we achieve what the Government calls a living wage. We continue to underinvest in the key ingredients of long-run growth and productivity, such as public research and development and education, and we continue to distort the economy with tax breaks. While the Government was correct to emphasise investment, the increase in capital spending should have been accompanied by tax increases rather than tax cuts. We need a national conversation about how we might develop a proper model of development, growth and prosperity fit for the 21st century , a new economic model, if you will, that prioritises productivity, good jobs, economic security and resilience. We will be waiting another year, it seems. We will read with great interest the Government's Future Forty - A Fiscal and Economic Outlook to 2065 report. We are happy to take questions.
