Jim Power: Budget countdown begins with big promises
This expenditure package will be comprised of current expenditure increases of €5.9bn or almost 75% of the total; and capital spending of €2bn or just over 25% of the total.
Proposed Vat cut
On the tax side, the Government has given a commitment to reduce the Vat rate for part of the hospitality sector — the food element — to 9% and this would cost around €580m in foregone taxes. If this is delivered and applies from January 1 next, it means that effectively less than €1bn would be available for personal tax changes.
To put this in context, it is estimated that a 1% indexation of the employee tax credit would cost around €230m in a full year, so to index for projected inflation in 2026 would cost somewhere in the region of €460m; or a 1% decrease in the 40% tax rate would cost around €540m.
If the government delivers the Vat cut from the beginning of 2026, which it has committed to, the tax package will be small. So not surprisingly, there are suggestions that the cut might be delayed until July, thereby significantly reducing the cost in 2026.
If this transpires, the hospitality sector would have every right to be aggrieved. Restaurants and food businesses are the most crucial element of our tourism product, and many businesses are struggling to stay afloat.
Inflation
Data released by the CSO last week show that in 2024, Irish food prices are the third highest in the EU-27 and are 12% above the EU average. In the year to May, agricultural output prices increased by 20.7%, with cattle prices up by 48%. These prices obviously feed into restaurant input costs, but the pressures are compounded by labour costs, insurance, water charges, commercial rates etc.
I am a supporter of the reduced Vat rate, and I think it is now more appropriate to provide some limited support to a key employer of people all over the country, and a vital part of the tourism offering, rather than to pump money through excessive expenditure into an economy that is still doing quite well.
Does the Irish economic cycle need a continuation of out-of-control current expenditure now? I think not.
Even if the Vat cut is pushed out, the extent of the easing of the personal tax burden will be miniscule.
We should have learned from the past
We should have learned our lessons from the pro-cyclical policies of the past.
The summer economic statement projects planned expenditure of €108.7bn this year, which is €3.3bn higher than planned in Budget 2025, and it is likely to turn out even higher than this latest projection.
Not surprisingly, the Irish Fiscal Advisory Council is not happy and has justifiably accused the Government of 'poor planning and budgeting.'
Obviously, the ability of the two ministers to deliver the proposed budgetary package, and indeed to deliver the ambitious, but detail lacking, revised National Development Plan, will be heavily contingent on the future performance of the economy, and especially the actions of Donald Trump.
Downward creep in projections
There is not a lot of detail in relation to economic assumptions in the summer economic statement, but it is interesting to note that for 2025 the Department of Finance is projecting growth of 2% in modified domestic demand (MDD), down from 2.5% in April, and 2.9% in Budget 2025 last October.
For 2026, MDD is projected to grow by 1.8%, down from 2.8% in April, and 3% in Budget 2025. There is downward creep occurring in Ireland's economic projections, which seems logical in the context of Trump-induced uncertainty.
In relation to the National Development Plan, it is quite amazing that we must await detail on the projected spend until close to budget time. What in the name of God has been happening since January?
The aspirations outlined in the revised plan — such as energy, water, housing, transport infrastructure, and climate change — are difficult to argue with, but delivery on time and on budget will be essential.
One hopes there will be greater control, transparency and accountability in relation to National Development Plan delivery than we have seen with major infrastructure projects such as the children's hospital and the infamous bicycle shed.
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