Spare a thought for the officials and politicians preparing the budget in today’s relentlessly unpredictable world. The Summer Economic Statement presented by Ministers for Finance Simon Harris and for Public Expenditure Jack Chambers on Wednesday is a case in point.

The Department of Finance’s chief economist John McCarthy was clear that the exercise, which establishes the fiscal space available for Budget 2027, did not include any new forecasting.

The expectations for next year’s economy remain those set in the Annual Progress Report published in April, from data available to the end of March, though McCarthy believed that “the economic and fiscal situation is largely as we set out in the spring”. 

In a normal world, this would be perfectly reasonable. But we live in a world where US and Israeli missiles began to rain on Iran on February 28, with the effects of the war in the Middle East only beginning to be felt when Government forecasts were made; where climate change-induced heatwaves caused widespread economic disruption through June and July yet to translate into the GDP of Ireland’s main European trading partners; and where the AI models driving investment and stock market valuations demonstrated on Tuesday they could suddenly decide to become hackers.

God only knows what else will happen by the time Harris, Chambers, and their officials update their forecasts for budget day on October 6, let alone when measures are implemented next year. One of the aims of the budget will be to ensure readiness, both in the face of known challenges like demographics and “unknown unknowns”, McCarthy said.

The Summer Economic Statement allows for an €8.5 billion package made up of €7 billion in additional spending and €1.5 billion in tax cuts. The bulk of the tax package will go towards raising the income tax band threshold, Harris made abundantly clear.

The advisory Tax Strategy Group’s papers published on Thursday show that indexing tax credits and the band cut-off point on the four per cent increase in wages forecast next year, as hinted at in the Programme for Government, would cost just over €1 billion. This might leave crumbs for an increase in inheritance tax bands (a mistake) and some niche business tax reliefs.

Yet three major uncertainties could yet upend the assumptions behind these figures.

Corporation tax about to go wild, again

The first is the actual tax take from multinationals, which has driven Exchequer revenue growth for the past decade. In the first half of this year, the five per cent increase in this tax head “is in line with profile, with no indication, at least at this stage, of overperformances of the scale seen in recent years,” the Summer Economic Statement notes.

This, however, was the exception rather than the rule. The Irish subsidiaries of multinationals are only now beginning to pay the top-up corporation tax required to reach the globally agreed 15 per cent minimum rate. This revenue stream will, again, become wildly unpredictable in the second half of this year.

Budget 2026 allowed for an extra €3 billion from such top-up taxes this year. Ministerial briefings obtained by The Currency show that this remained the official estimate at the start of the year. Microsoft alone has now reported that it incurred €654 million in so-called Pillar Two taxes falling due this year.

As I have shown previously, companies will make this first payment over time, depending on the dates of their accounting year. Crucially, Apple’s €1.2 billion top-up tax for the past year is not due until next February.

An annual €3 billion boost was what I estimated the new 15 per cent minimum rate would yield for the Irish Exchequer as early as September 2023, when I applied its complex formula to the known figures for affected multinationals operating in Ireland. But that was on the basis of the figures available at the time – for 2021.

Since then, this business has boomed. Revenue figures show the taxable profits of foreign-owned multinationals doubled in three years to hit €245 billion in 2024, the latest year now available. Applying the same (rough) calculations to these figures shows that the top-up tax would add almost €7 billion to the tax take each year (including the €3 billion already expected this year).

For 2025, Revenue has received preliminary payments but no detailed tax returns from companies yet. However, analysis of the trend in early statistics by the Tax Strategic Group “indicates that, generally speaking, corporate profitability increased significantly in 2025”. This will, in turn, generate larger top-up tax liabilities for multinationals, payable in 2027.

I have yet to see any of this explicitly mentioned in Government forecasts.

Conversely, corporation tax could come down. For years, the Government has highlighted the risk associated with “windfall” corporation tax from multinational activity not related to the domestic economy. The Department of Finance forecasts this to be €20 billion this year and €21.3 billion next year.

The former minister for finance, Paschal Donohoe, used to issue routine warnings about the uncertain nature of this revenue. His successor, Harris, not so much. Windfall corporation tax has visibly been the fastest-growing financial resource of the State since its invention in 2021.

Recent ministerial briefing papers detail exactly how officials calculate this: “Put simply, windfall is estimated with a counterfactual: What if corporation tax had grown in line with the domestic economy from 2015? This is calculated by growing the 2014 corporation tax base by modified national income (GNI*) each year. ‘Windfall’ receipts are the difference between this scenario and the actual outturn.”

Arguably, this definition is out of date. It was valid five years ago, as multinationals had just unwound exotic tax structures and many had chosen Ireland to onshore high-profit-yielding intellectual property as they booked profits warped by the pandemic.

It is less so now as those that stayed here have cemented those early paper moves with permanent structures featuring additional employees, pharmaceutical factories, and data centres. 

As multinationals’ taxable business in Ireland has grown, its share that is exposed to flimsy tax-driven decisions has reduced. Lumping all activity above a 2014 base level in the “windfall” category is no longer relevant, and fails to account for the real risk remaining over a portion of this tax revenue. I, like Government officials, am at a loss to tell you how large it is.

AI bubble

The second multinational-driven uncertainty is the risk of an AI bubble bursting. The Summer Economic Statement dwells on the boom in “AI-related hardware” (ie data centres) and its role in supporting domestic demand.

Yet a separate publication by the Department of Finance the same day sounds the alarm on the high valuation of AI-linked stocks and their weight in pensions and investment funds. 

“A correction in US technology valuations could therefore transmit through several channels at once: weaker household wealth, tighter financial conditions, lower multinational investment and employment, and weaker external demand,” officials wrote.

In their estimate, an AI-related market correction resulting in a 10 per cent drop in US equity prices would trigger a 1.6 per cent reduction in Irish modified domestic demand (MDD), with knock-on effects on overall economic growth and employment.

A more severe 20 per cent Wall Street crash would shave 3.3 per cent off MDD. The impact would be stronger on wealthier households, who are more likely to have invested in exposed stocks.

Will inflation offset most new spending?

The third threat to budget plans is inflation. In line with its medium-term plan, the Government is planning a six per cent increase in both current and capital expenditure.

While this is based on the Annual Progress Report’s baseline scenario of a 2.5 per cent inflation rate next year, the Summer Economic Statement notes that annual inflation has been running at well over three per cent since March, of which one is directly attributable to higher energy prices.

The European Central Bank, after it increased interest rates by 25 basis points in June, kept them unchanged last week but signalled a second hike is coming in September.

With no sign of a peace deal in the Middle East, the economy is slipping towards the “adverse” alternative scenario developed by officials in the Annual Progress Report (though not the “severe”, $150-per-barrel version). 

“In the adverse scenario, inflation is projected to increase relative to the baseline in the near-term, with average annual HICP inflation of around 3.75 per cent in 2026. Inflation moderates somewhat thereafter, but remains elevated in 2027, with annual inflation averaging close to 3.5 per cent,” officials wrote. This would dampen MDD by 0.5 per cent next year, they added. 

While slower growth would affect the tax take, higher prices would eat into the planned increase in spending – whether through harder bargaining by unions as public sector pay talks begin, or more expensive procurement into next year. 

The good news is that general inflation has become less directly linked to fossil fuel prices than in the past. On Friday, Dan estimated that even a doubling of oil and gas prices would only push inflation up to five or six per cent, and the official forecast doesn’t envisage significant second-round effects under the adverse scenario.

Asked how much of the Summer Economic Statement’s spending increase was earmarked for the public sector pay deal, Chambers kept his cards close to his chest. When I followed up to ask him whether an increase in the inflation forecast for next year would justify a revision of the spending package in the budget, he stuck to his guns.

“We’ve set out the medium-term fiscal and structural plan of the growth rate of spending. It’s an average of six per cent between 2026 and 2030. That’s what we’re committing to do,” the minister said. 

When the economic environment is so volatile, sticking with your plans is the best you can do. Whether those plans hold until budget day, or survive perennial overruns next year, is another story.

Elsewhere last week…

What began as a small, singular pub in Donegal town is now the McCafferty’s group, a multi-million-euro international enterprise boasting the world’s largest Irish pub – all led by local rallying royalty. Michael unpicked the complex structure of the Boyle family’s business.

Following the high-profile cancellation of a conference planned at the Powerscourt Hotel by Dialog, the conference network backed by Peter Thiel sued the venue in the High Court on Wednesday. Francesca broke the story.

As Andy Burnham became UK Prime Minister on Monday, former Manchester resident Susan O’Keeffe reflected on the new Labour leader’s promises to bridge England’s north-south divide – and the wider distrust in British politics.

Niall interviewed Martin Whelan, who became chief executive of the Housing Agency just over one year ago and believes there are now signs that Ireland is making progress in addressing its housing crisis.