Budget 2026: economic outlook

Budget 2026: more spending will support growth, but risks pushing up inflation

As expected, the budget provided an extra €9.4bn of stimulus to the economy, with most of this coming through a €8.1bn increase in spending, while tax cuts make up the rest. Another expansionary budget will continue to support growth next year, helping to offset some of the drag from US tariffs.

That said, the budget poses a potential risk to inflation. The domestic economy is already growing strongly, and the labour market is at full employment, which means a big fiscal stimulus could easily overheat the economy and push up inflation.

Admittedly, the government has taken some action which will help to dampen inflation such as cutting VAT from 13.5% to 9% for food-led hospitality, hairdressers, and new-build apartments. The academic literature suggests that around 50% of previous VAT cuts in the hospitality industry were passed on to consumers, which will help to weigh on inflation.

However, the risk that fiscal stimulus boosts inflation is even greater given that the European Central Bank’s deposit rate currently sits at 2%. We doubt that’s restrictive enough to weigh on inflation in Ireland given the economy’s recent strength.

We think the government should have exercised more fiscal restraint to reduce the risk of overheating the economy. Indeed, at €5.1bn the surplus will be half as large in 2026 compared to 2025.

Digging deeper into the spending commitments, it’s a little disappointing that only €2bn was allocated to capital spending given the rhetoric of Budget 2026 being ‘pro-investment’. Investment is broadly flat compared to 2008 levels, once we remove distortionary multinational activity, so bigger increases in investment should have been a priority. Those supply-side investments, such as infrastructure projects, would boost growth in the long run without fanning the flames of inflation.

Turning to the public finances more broadly, the government should be cautious. Over half of corporate tax receipts come from just 10 multinational firms and 20% of workers’ pay around 80% of income tax. Given the narrow tax base, the big risk here is if the US administration pursues policies designed to discourage companies from reporting profits abroad, this would leave the public finances facing a significant shortfall as suggested by the underlying deficit. Fortunately, Ireland’s public finances are far healthier than our European peers, which would give the government some cushion against any potential loss of revenues.

Ultimately, strong government spending will continue to be a tailwind to growth throughout next year, even if the economy doesn’t need further stimulus. Indeed, we expect domestic growth of a little over 3% this year and 2.5% in 2026. The big question is whether the budget overheats the economy and pushes up inflation.