The Government needed a break in advance of the budget on October 6th. It does not look like it’s getting one. International events have moved against it in recent days, and while Tánaiste and Minister for Finance Simon Harris has talked about giving “certainty” to households, this is unfortunately impossible to do. Who knows what could happen over the next four weeks?
The risk for the Coalition is that the backdrop to budget day is a bubbling international energy crisis, upheaval in international markets and fears of rising inflation and interest rates.
The plan has been to park a lot of the pesky energy questions until after the budget and see how things look in November when the phasing back in of previous excise duties is due to start. What to do with carbon tax was always going to have to be dealt with on budget day. But delaying the call on excises would allow Harris to go ahead with the plan to cut income tax, without having to see some cash taken away from the €1.5 billion pot available for tax cuts to pay for a continuation of the energy reliefs well into 2027.
The extension of the excise reliefs during this year can be taken out of the 2026 budget – and so has no impact on next year’s figures. But pushing them well into 2027 would, of course, have a cost that needs to be accounted for in next year’s figures. A decision on this may still be delayed until after budget day, in the hope that “things” improve.
However, with the cost of a barrel of oil over $100 and wholesale gas prices up sharply – threatening higher electricity bills – this strategy is looking a bit threadbare. The Irish budget is in effect held hostage by events in the Middle East, with the Gulf States and Iran trying to broker a compromise on the Strait of Hormuz and attacks by the Iran-backed Houthis on Yemen – threatening Saudi oil exports through the Red Sea – posing a new danger. Knowledge of the geography of Middle East shipping routes is a new economic essential for us all.
This week, just as the Coalition parties – and the Opposition – held their PR-driven and inappropriately named “think-ins”, all this took a turn for the worse. Backbenchers mumbled about helping middle earners, cutting inheritance tax and childcare, without reference to the darkening clouds.
Oil prices shot higher and international bond markets, which reflect expectations on inflation, took a nasty tumble. US president Donald Trump’s assertion that there would be no improvement until after the November midterm elections played into the upheaval on global markets this week.
There will be fingers crossed in the Coalition that energy prices ease a bit over the next few weeks. And who knows what will happen? But with a jump in household energy bills already under way, rising health insurance costs and talk of higher food prices next year, the risk for the Coalition is that budget concessions are blown away by higher costs elsewhere – that it becomes an exercise in damage limitation, rather than the promised boost to the hard-pressed early risers. Hopes of engendering a feel-good factor are being replaced by an exercise in alleviating grumpiness and, in some cases, real financial distress.
The piece of this that has not hit the headlines yet – being overshadowed by the €2 a litre at the pumps dilemma, which the Coalition created for itself – is the sharp rise in wholesale gas prices. The price has now reached 200 pence sterling per therm, and while this is less than half the brief peak reached after the full-scale Russian invasion of Ukraine in 2022, it is not far from the average levels that applied during that year. The lingering impact on the European market of the impact on Russian supplies is also a factor. And with gas a key fuel for Irish electricity production, this is ominous for households, with Bord Gáis and Energia already increasing prices.
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Unless wholesale energy prices fall back, this is going to pose a big issue for the Coalition on budget day. A special Government taskforce has been looking at options for permanent supports for less well-off households to help deal with energy costs, as well as how the whole market is structured. More one-off supports may also be considered for household bills – and if so they should focus on those who need them.
The real risk now for the budget ministers, Harris and Jack Chambers, is that energy issues become the dominant story around the package. Delaying the planned carbon tax hikes would leave a hole to be filled in funding retrofitting and social supports, for example, where money raised from this charge is spent. Chambers may also have to budget for some kind of household energy supports. Harris has to decide how to dance around the excise issue.
The Coalition will go ahead with its income tax package. It will deliver cash to households, even if it may not do much more than index the system for wage inflation. A €2,000 rise in the income tax band, for example, is worth €400 in a year for those who earn enough to fully benefit (€46,000 for a single person), and when changes to tax credits and the USC are added in, the cash gains will rise.
Budget 2024, with an income tax package of just under €1 billion, was worth over €800 per annum to many single earners on middle to higher incomes, though significantly less in cash terms to lower earners. Gains would near enough double for dual income households. This year’s may be roughly similar.
The risk for the Coalition is that these gains are overshadowed by all the other cost rises facing households. There is, of course, only so much the Government can do. But all its talk of giveaways, helping families and giving certainty has raised expectations. There have been attempts in recent days to dampen these a bit, particularly in relation to income tax. And the Government remains in a better budget position than just about any other EU country. But there are going to be some rows in the Coalition in the next few weeks as they try to finalise a credible package. And there are significant fears about an energy takeover of Budget 2027.