1. Can the budget accelerate the building of apartments?
State support for apartment building – already very significant – has grown yet further in the budget. The key measure was reduction in the VAT rate on the construction of new apartments from 13.5 per cent to 9 per cent.
There is also a corporate tax exemption for profits associated with cost-rental properties, enhanced tax deductions for apartment construction costs and other tweaks to schemes such as the Living City Initiative.
When you consider the range of schemes already in place and the fact that a significant number of schemes are being advance purchased by the Land Development Agency (LDA) or approved housing bodies (AHBs), many for cost-rental schemes, the extent of State investment is now huge.
[ Buyers fear VAT cut on apartment sales could be a double whammyOpens in new window ]
Despite the existing supports, indications had been of a fall-off in new developments being planned, with developers complaining about a “viability gap” – meaning that when they compared costs with likely returns the sums did not add up.
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Planning challenges and delays add uncertainty in to the mix. And without a lot more apartments being built the Government will not come anywhere near its housing targets.
An international cost report by the Society of Chartered Surveyors Ireland (SCSI) and Trinity College last year found Dublin to be the second most expensive of 10 European cites covered to build apartments, behind only Zurich. The cost here was some 15 per cent above the average, meaning that even if VAT went to zero, Dublin would still be classed as the fifth most expensive city.
This means that the VAT change alone is no magic bullet, according to Bryn Griffiths, director of Turner & Townsend and chair of the SCSI’s quantity surveying professional group committee .
However, he said it was welcome and was part of a range of policy measures – also including new regulations, the review of the rental cap and planning changes – which would be likely to make some schemes viable and thus accelerate apartment building. The funding environment had also improved somewhat, he said, and while building costs remained high, inflation in this area has eased significantly.
“It will help to tip the balance for some,” according to Griffiths, while additional funding for the LDA and AHBs will provide an “exit route” for developers – in other words a guaranteed buyer.
New building regulations, announced in July, that would allow developers to put more units into an apartment building and reduce costs generally, were also a factor in potentially improving viability, he said. Yet a judicial challenge to these new regulations taken by a group including several county councillors, which has come to light this week, “will slow or remove that benefit” from developer calculations, he said, at least for now.
Before news of the judicial review, developers had welcomed the regulatory changes and the budget moves. Michael Stanley, chief executive of Cairn Homes, said: “This is absolutely enough to be the tipping point – helped by the fact that building cost inflation is very low again, after a few tough years.” However, for some schemes at least, the judicial challenge to the new regulations is likely to lead to developers sitting on their hands for a period to see what the outcome is.
Apartment building had fallen sharply last year, dropping by 24 per cent to 8,763. This resulted from a withdrawal of international investors after 2021, due to higher interest rates and also rising costs. The Government’s revised housing plan, due shortly, is likely to indicate further measures in areas such as planning and land supply.
Billions of euro, literally, are going in to the push to build more apartments and, while the numbers will almost certainly rise, the question is whether annual completions can cut in to the 20,000 to 25,000 range needed for the Government to meet its overall housing targets.
2. What will the budget really mean for the amount you pay in tax on your income?
This isn’t straightforward. So let’s take it step by step.
First of all, there is the direct impact of the budget measures on the amount you pay in tax and other charges on your current income. Here, for most people, there is a small increase in terms of tax payments and a small minus.
The addition comes in terms of higher PRSI – this is part of a previously announced policy to push the employee PRSI charge higher over a period of one year. It rose by 0.1 per cent this month and will go up by 0.15 per cent next October.
There isn’t big money involved here – a single worker on €55,000 will pay an extra €62 next year, while it will cost someone on €100,000 an extra €113. This more than offsets the small €13 gain from a tweak in the USC related to the rise in the minimum wage.
For most middle earners the balance amounts to an extra €1 to €2 a week. As a result, the effective tax rate on incomes, the average charge on all you earn, will edge slightly higher – for example, from 23 per cent to 23.1 per cent for our €55,000 single middle earner or from 22.1 per cent to 22.2 per cent for a married couple with one earner on €75,000.
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So if we look at this from what you might call a static point of view, it is really not much of a change. It is different from recent years, of course, when people benefited from higher income tax bands and credits. For a single mid-income worker this was worth about €800 in 2025, due to the measures in last year’s budget. For a one-income married couple it was typically worth about €1,000.
However, the world is not static and there is another, more significant factor at play. Many people get wage increases during the year either in their current job, or when moving to a new one. By not changing the tax bands and credits to account for this, people end up paying slightly more in tax. As inflation eats away at the value of tax credits, those on lower to middle incomes find more of their earnings exposed to income tax. Not adjusting credits affects middle to higher earners, too, but the key factor for them is not adjusting the income level at which someone enters the higher 40 per cent income tax rate. So, if their wages rise, a higher proportion of their income is taxable at this rate.
[ Anti-populist budget offers little for middle-income earnersOpens in new window ]
If we took our earner on €55,000 and applied a 4.5 per cent wage increase next year – in line with Department of Finance forecasts – then they would pay almost €500 more in income tax than they would in a situation where the standard tax band was fully indexed for wage inflation. Analysis by the Central Bank shows that between 2019 and 2023, the income tax system was not fully adjusted for wage inflation, but enough was done to account for 80 per cent of wage rises. Had this continued this year, our €55,000 earner would be €400 better off.
Of course, individual circumstances vary hugely. It is still better to get a wage rise than not to get one – it’s just that you will end up paying a slightly higher proportion of your income in tax. The real issue would emerge if this non-indexation were to continue for a number of years.
There has been debate on whether the tax system – and welfare payments – should be automatically indexed for inflation each year in the budget, requiring a decision of the minister or ministers of the day whether or not to go ahead.
A study by the Tax Foundation showed that 12 of the 24 European countries in the OECD with progressive income tax systems apply automatic indexation of their income tax systems, including big players such as France, Germany (every two years) and many of the Scandinavian countries.
There is a case for a similar approach here, and also for indexing welfare. But, as these will remove the opportunity of the ministers to trumpet “giveaways” – and officials may feel it limits flexibility – this is unlikely to happen.
3. Is this a ‘prudent’ budget?
Minister for Finance Paschal Donohoe has argued that significant measures are being taken to safeguard the public finances if they do take a hit. These include continuing to put money away into two funds for the future – due to rise to €24 billion by the end of next year.
A budget surplus of more than €5 billion has also been forecast for 2026, giving some leeway if taxes come in below target or spending overshoots.
The question is whether all this is enough, given the enormous exposure of the public finances to potentially volatile corporate tax receipts.
“Having called for a tightening of the fiscal stance in Budget 2026 for well-rehearsed reasons,” according to Alan Barrett, research professor at the Economic and Social Research Institute (ESRI), “the first number I checked in the budget documents was the general budget balance for 2026, adjusted for the ‘windfall’ element of the corporate taxes,” which is the amount the department estimates is related to tax planning, rather than real activity in Ireland.
“To put it mildly, I was surprised to see that the underlying deficit is projected to be €13.6 billion. This is much larger than the projected underlying deficit for 2025 – €7.4 billion.”
As a percentage of modified gross national income (GNI*), the underlying deficit will increase from 2.2 per cent in 2025 to 3.8 per cent in 2026. “For context, the EU fiscal rules say that a deficit should not exceed 3 per cent of GDP.”
This suggests, says Barrett, that the overall budget package is “stimulatory and procyclical”. The other surprising aspect of this, he said, was the limited attention paid to the underlying deficit in the political debate. “Again, this is reminiscent of 2007 where all parties seem eager to increase spending based on a potentially vulnerable tax base, and there’s a collective silence on the vulnerability.”
In its first reaction, the fiscal council said that the budget again added cash to a growing economy – that could leave less scope in the event of a downturn. It also pointed to the lack of longer-term budget forecasting and the continuing rapid pace of spending growth, with no guarantee that 2026 forecasts will be adhered to.
A contrary view is taken by Davy Stockbrokers. In a post-budget assessment it said that it had examined the latest Irish economic indicators, and found “limited evidence that the Irish economy is about to overheat”. The brokers note the official forecasts of a deficit next year if windfall or excess corporation tax is excluded. However, they say that Ireland’s national debt burden is continuing to fall and that, “along with infrastructure gaps, this would provide a rationale, if necessary, for the Government to borrow for investment”.
At the centre of this argument is the impossibility of judging the extent of Ireland’s exposure to a potential fall-off in corporation tax and, if trouble hit, how quickly this might happen.
But two things are clear. First, Ireland’s tax base is hugely reliant on these taxes – leading to the ESRI comparisons with 2007, when property-related taxes collapsed.
And second, the Government has still to publish any medium-term strategy for spending and tax for the rest of its term, to try to put this exposure in the context of likely spending trends. This analysis is promised shortly, though how comprehensive it will be remains to be seen.
