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The Irish government faces significant hurdles in making Budget 2027 credible due to spending overruns, reliance on corporation tax, and the complex balancing of fuel excise duty cuts against planned income tax reductions.
The framing of Budget 2027 is going to be a controversial process and a key challenge for the Coalition is to make it a credible document.
Events this week have shown that this will not be a straightforward exercise. First, the Irish Fiscal Advisory Council , the budget watchdog, again pointed to the overruns in Government spending this year. Unless the Budget is framed by taking these all into account – and recent experience suggests this will not happen – then the spending estimates for 2027 will be unrealistic. This sets the scene for inevitable overruns next year and so the cycle continues.
This profligacy has been paid for by corporation tax receipts coming in ahead of budget. Inevitably, at some stage, this will not continue. Even if there is no broader collapse in corporation tax, a stalling in the growth rate would quickly lead to pressures on budgetary forecasts. The second sign of potential trouble came in the Coalition’s decision to extend the end date for the excise duty cuts introduced earlier this year.
By doing this, the Government has been seen to put an effective cap of around €2 a litre on the level of petrol and diesel prices it is willing to tolerate. The question is what happens if prices are still hovering around this level in November, when the first reversal of the excise cuts is due?
How ICG’s push to close €1.2bn buyout in August’s holiday lull backfiredExtending the cuts further would increase the impact on the Budget 2027 figures, potentially significantly. The Government’s intention, no doubt, is to phase them out, but it has also hedged its bets by hinting that it will react if prices stay high. The first decision point comes after the Budget itself – when €1.5 billion in tax cuts centred on income tax are due to be delivered.
By setting the date for the first reversal of the excise cuts after this, the Government is leaving the way clear for the income tax package and avoiding a decision on which area is its priority. There are sensible ways forward. The Government needs to set spending targets it can stick to, rather than notional figures drawn up to get through budget day. This will require decisions during and after the budget.
A 6 per cent rise in spending next year is more than in most other EU countries. But still the Government has trouble sticking to these kind of figures. On energy costs, the Coalition must end unsustainable universal supports. It has asked a taskforce to recommend ways of targeting help and also of reforming the energy market.
It also has the views of the Economic and Social Research Institute, clearly showing that targeting energy poverty can make a difference. There are awkward questions here because of the uncertainty and volatility of energy costs. And the need to push forward the climate agenda. But extending universal supports is not the way forward.
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