Budget 2027 - The Economic and Fiscal Backdrop

Budgets appear to come around faster, and we are now on the verge of receiving rich bounties from the Minister for Finance and the Minister for Social Expenditure & Reform in Budget 2027. These days, budgets tend not to provide the surprises of years gone by, as in recent years there appears to have been a concerted effort to leak as much of it as possible ahead of the big day. Of course, the point about the whole budgetary process is that nothing is decided until everything is decided, and the negotiations tend to keep going late into the night before its delivery. 

Geopolitical Uncertainity 

One always tends to say that the latest budget is being presented against a very uncertain background, but I guess this is probably an accurate description on this occasion. The global economic and geo-political background is radically uncertain now. The wars in Ukraine and Iran are ongoing (lots of other wars also); oil and natural gas prices are at very elevated levels; inflation is well above what central bankers would desire; US and Euro Zone interest rates are rising and are likely to rise further; tariffs are higher than they were, but not as bad as threatened; bond markets are under considerable pressure, with bond yields hitting highs not seen in almost 25 years in some jurisdictions, driven by concerns about the path  of short-term interest rates, elevated debt levels, and concerns about inflation, which is persistently above the 2% level that central bankers tend to target; and radical populist politics are asserting themselves in EU stalwarts such as France and Germany. 

Despite these issues and uncertainties, global economic growth is stronger than might have been expected, and equity markets are still being sustained by strong growth in earnings. Of course, the ongoing AI investment boom is helping support economic activity and equity markets. Therein lies a potential risk to the sustainability of global economic resilience.

Irish Economy

Domestically, the Irish economy is also displaying significant resilience. Modified domestic demand (which is a much better indicator than GDP) expanded by a healthy 3.1% in the first half of the year; employment reached a record high of 2.839 million in June and the unemployment rate is steady at 5% of the labour force; the Exchequer finances are still showing amazing buoyancy, with income tax and corporation tax very strong; and the underlying export performance is solid, although the year-on-year comparison is negative, due to the fact that there was a dramatic tariff-driven surge in exports last year.

On a slightly more negative note, the consumer is under pressure due to the elevated cost of living.  The headline inflation rate stood at 3.7% in August, but between August 2020 and August 2026, average consumer prices increased by 27.9%. This is feeding into business costs and is pressurising consumer spending power. The impact of the Iranian war is feeding through strongly in energy markets, and this would be more pronounced but for the intervention of Government in cutting excise duties on motor fuels. This is the manifestation of the so-called cost of living crisis, that will be hugely influential in Budget 2027. On the cost-of-doing business side, business costs have risen strongly in recent years, with energy and labour costs particularly pressurised. However, in overall terms, the domestic economic backdrop is quite healthy and resilient – there are always challenges.

Budget 2027

In relation to Budget 2027, the Summer Economic Statement published in July indicated a total budget package of €8.5 billion, with a spending package of €7 billion and a taxation package of €1.5 billion. Of the €7 billion spending package, which is equivalent to growth of 5.9% in public spending, current expenditure is pencilled in to increase by €5.9 billion, and capital expenditure to increase by €1.1 billion. 
Although, the Government has said that the budget package to be delivered on October 6th will adhere to these commitments, it just might change as it is now clear that corporation tax receipts will significantly out-perform the projections from the Department of Finance earlier in the year. In addition, the cost-of-living crisis has been exacerbated by the elevated level of energy prices, and this situation does not look like improving anytime soon. The Government is very wary of further fuel protests, the threat of which is very much bubbling close to the surface. 

Areas for Director to Watch out For

There may be some minor surprises in the budget, but the following are some of the areas to watch out for. 

•  Will the Government adhere to the expenditure increase committed to, or will it continue to ignore the warnings from IFAC?
• The size of the social welfare package - an increase of €7.50 in weekly welfare payments has been speculated upon, but there is pressure to match the €10 increase of last year. 
• The cost-of-living crisis - the Minister for Finance has stated that no government in the world can absorb all of the impact of the global energy shock, but that it is looking into a number of issues that would provide certainty when it comes to energy costs this winter. An extension of the excise duty cuts is likely to be the minimum delivered. The approach to carbon taxes will be interesting in the context of the intensifying climate change crisis.
• Will there be other cost-of-living measures introduced? 
• Will childcare get much-needed support?
• Will the funding of disability services be boosted?
• The housing challenge – it appears likely that the Renters’ tax credit will be increased further, but other measures may also be considered to boost housing supply and help buyers and renters.
• Make work pay has been the mantra over recent months – the focus is likely to be on increasing the standard rate threshold by up to €2,000 to €46,000 for one worker, and from €53,000 to €55,000 for a single income couple. 
• Possible widening of tax credits and allowances, which did not happen last year.
• Will there be any change to inheritance tax structures and thresholds? 
• Details of the new investment product is set to be announced. With €176.4 billion sitting on deposit in the banking system earning negative real returns, there is an opportunity to intervene in a very positive manner.   
• The Low Pay Commission (LPC) recommended increasing the national minimum wage by 79 cent to €14.94, which is an increase of 5.6%. It remains to be seen if this full increase will be announced, as there is intense lobbying for a lower increase. No Minister has ever ignored the LPC recommendation. It will also be interesting to see if the 2029 target for the Living wage will be amended.
• The USC bands will be adjusted as is normal, to accommodate the increase in the minimum wage. 
• Measures to help the SME sector – there was nothing of any substance last year, so the hope is that something meaningful will be delivered this year. For SME’s the increase in the minimum wage will add to the cost of doing business, not least due to relativity, so it will be interesting to see if any tax changes for SMEs will be implemented to compensate. 
• The Bank Levy likely to be rolled over. 

All will be revealed on Tuesday, Have a Happy Budget! 

This article is the view of the author(s) and does not necessarily reflect IoD Ireland’s policy or position.

About the Author

Jim Power has worked as an economist in the private sector for over 35 years. He is owner manager of Jim Power Economics, an economic and financial consultancy, which he set up in 2009. He was previously Treasury Economist at AIB (1987-1991), Chief Economist at Bank of Ireland Group (1992-2000) and Chief Economist Friends First Group (2000 to 2018). He is a board director of Love Irish Food, BMW Financial Services,  and Arboretum Garden Centre. He is a member of the Institute of Directors in Ireland. He successfully completed the Institute of Directors Diploma examinations in Company Direction in 2022.  He teaches on the Executive MBA and the Full-Time MBA at Smurfit Business School, UCD. 

In February 2021, Jim and Chris Johns launched their own Podcast ‘The Other Hand’, which is available on Apple Podcasts, Spotify and other podcasts hosts. He lives in Dublin and is a native of Waterford. He comes from a farming background.