I thank the Cathaoirleach and members and staff of the committee for the invitation to appear before it. We value the opportunity to give our views on the context and priorities leading up to budget 2027 and on budgetary policy more generally.
Most of the big budgetary decisions are already made. The summer economic statement provides for a fiscal package of €8.5 billion in new measures. This is made up of €5.9 billion in current day-to-day spending, €1.1 billion in extra capital spending and tax cuts amounting to €1.5 billion. Much of the nominal increase in day-to-day spending will be absorbed by inflation, population growth and the demand cost pressures of an ageing population. A deal on public pay that adequately compensates workers will also need to be accommodated. The mooted indexation of the income tax system will absorb most, if not all, of the space for tax cuts – 5% indexation, for example, would absorb all of it. In practice, there will be very little in desperately needed policy innovations - whether a second tier of child benefit to reduce child poverty, as the ESRI mentioned; roll-out of a public childcare model; or game-changer supports for the green transition. Without tax increases, there will remain limited space for new major spending initiatives.
We know the fiscal picture will darken in the years and decades to come. We would, therefore, point to the Commission on Taxation and Welfare’s menu of options for raising taxes, from various capital tax reforms to the rolling back of a range of our badly conceived and designed tax breaks.
The economy has grown rapidly in recent years, with economic growth set to continue into 2027. The employment rate is close to its record high and employment continues to grow. Inflation remains high due to the energy supply shock caused by the war in the Middle East and is likely to remain elevated in the short term, with Brent crude in excess of $100. CSO analysis shows that lower income households are experiencing higher rates of inflation this year than richer households. More than one in seven households were already experiencing enforced deprivation in 2025. Yet it is misleading to frame the cost-of-living pressures as being experienced universally. Many are doing very well. The savings rate is highly elevated, and deposit levels are increasing by hundreds of millions every month. Universal giveaways are not needed. The economy has never been stronger and clearly does not need fiscal support. Indeed, the budgetary package as set out is modestly pro-cyclical and inflationary. A more prudent approach would be a package of net spending growth that is marginally smaller than the economy’s potential growth rate of 4.5% to 5%. Higher levels of gross spending can, of course, be funded by broadening the tax base.
Times of economic strength are precisely when we should be increasing taxes and preparing for the future with strategic foresight. This does not preclude us from protecting people from cost-of-living pressures, and we should protect the vulnerable, but it does mean we have to choose who to support and how best to do it. We are an energy importer experiencing a negative terms-of-trade shock, and we are collectively poorer because of it. Fiscal supports to protect households from the energy crisis should, therefore, be understood as distributional in nature. The nature of the supports is about deciding who in Ireland pays the extra cost rather than avoiding the cost per se.
Indexation of the welfare and income tax systems to the higher price or wage growth is, in our view, the most sensible first response to the crisis. This should be combined with generous subsidies to help lower and middle income households to reduce their demand for petrol, diesel and gas over time. The cost-of-living crisis is fundamentally an inadequacy-of-income crisis, and adequacy should be the goal in budget 2027.
As an aside, at a time when the poorest in society are enduring a cost-of-living crisis, it is odd, to say the least, that the Government seems to be focusing on lining up a basket of goodies for those best-off in society via the mooted tax breaks for inheritors and savers. Surely the Government has more pressing priorities.
Overall, the public finances are in good shape in the short term, with a healthy fiscal surplus and a manageable net debt ratio. Yet the headline figures mask severe vulnerabilities and concentration risks. Thus far, the surplus means that Ireland has been spared the recent bond market pressure faced by the United States, the United Kingdom, France and other advanced economies. Yet Ireland has been consistently plagued by unsustainable boom-bust fiscal policies that have arguably been the greatest source of economic volatility over the last half-century. Now is not the time for complacency and short-sightedness. We have recklessly developed a dangerous dependency on concentrated and potentially transitory revenues. We need a mature and honest debate about how we manage the public finances, how we raise revenue and how we allocate our precious fiscal resources. This committee is perfectly placed to fulfil this role.
In this context, there are a number of fiscal principles that we would endorse and that we are happy to elaborate upon. First, always be countercyclical. This means running meaningful current spending surpluses in good times and even in normal times. Second, apply a medium-term target that protects investment spending. This is to ensure that sufficient and stable resources for investment spending are protected across the economic cycle. Third, quarantine potentially transitory revenues. Windfalls and transitory or cyclical revenues should not be made available for use either to fund day-to-day spending or to finance tax cuts. Fourth, start a debate. This debate should encompass multi-annual budgeting, expenditure needs, fiscal sustainability, intergenerational fairness and revenue composition and sufficiency.
To be economically radical and protect our budgetary sovereignty, we will need to be fiscally conservative. Fundamentally, we need to embed and hardwire sustainable budgetary policy into our economic model. If we can achieve this, we will strengthen our economic resilience and protect ourselves from devastating and periodic bouts of boom and bust that culminate in inevitable and painful austerity. The world is a volatile, uncertain place. We should at least ensure we have our own house in order so we can withstand the storms to come. We are happy to take questions.
