Budget 2026 tax and welfare measures result in average income losses

Budget 2026 comes at a time when the Irish economy is performing robustly. Employment has grown rapidly in recent years, unemployment is low and the domestic economy is operating at or close to capacity. In this context, the macroeconomy does not need strong government support, but rather focused and targeted investment, particularly at infrastructure bottlenecks. At present, the fiscal stance [1] as outlined in the current and recent budgets is arguably too loose, and the reliance on unpredictable corporation tax receipts is a vulnerability. This means hard choices must be made between measures in order to have sufficient scope to support the economy in a downturn.

According to new research presented by the ESRI, at the household level, measures announced as part of Budget 2026 will result in small income losses next year — averaging 2% of household disposable income — compared to a budget indexed to forecast income growth. The withdrawal of temporary cost-of-living measures is responsible for much of this effect. There is variation in how Budget 2026 will affect households of different income levels, with slightly higher losses, of 2.5% of household disposable income, expected for low-income households.

Temporary cost-of-living policies, which have been a feature of the last number of budgets, have now been withdrawn. While inevitable, this withdrawal will result in a reduction in households’ standard of living in 2026. This loss will be felt across the income distribution, with low-income households losing significantly more as a proportion of their disposable income compared to high income households. The withdrawal of temporary measures results in losses of 4.1% of disposable income for the lowest income households compared to losses of 0.3% for higher income households.

For high-income families, these losses will be exacerbated by the freeze to tax bands and credits, which amount to an effective tax rise if wages grow at their forecasted rate of 3.7% in 2026. For low-income families, the withdrawal of one-off measures will be partly cushioned by the welfare package, which is mostly above forecast inflation and wage growth. The extension of the VAT cut to electricity and gas and the introduction of a cut to VAT on hospitality and hairdressing may result in small income gains, which are larger for high income households, if they are passed on to consumers.

The budgetary measures targeted at children, such as increases to the Child Support Payment and the Working Families Payment, are well-targeted. However, their effect on child at-risk-of-poverty rates will be small as they are accompanied by the withdrawal of many temporary measures. We estimate that these measures will lift around 2,000 children out of income poverty, compared to a budget pegged to income growth. However, many more targeted measures  will be necessary to achieve the government target for child consistent poverty of 3% or below.

Taking the last six budgets together, we find that, compared to a scenario of income-indexed budgets since before the pandemic, households are slightly worse off, by around 1.2% of disposable income. Those in the lowest income group, however, have seen positive income effects, ahead of both price and wage growth overall. Policy changes have been nudging poverty rates down since 2020 for most groups, with the exception of the elderly poverty rate, which will be up 4 percentage points in 2026 compared to a series of income-indexed budgets.

Claire Keane – an Associate Research Professor at the ESRI – said:

"The inevitable withdrawal of the temporary cost-of-living measures will impact those on lower incomes more. Some, but not all, of this loss is compensated by increases in social welfare rates that are ahead of both price and wage growth. Since 2020, there has been real growth in incomes due to tax and welfare reforms for those at the bottom of the income distribution.”

Karina Doorley – an Associate Research Professor at the ESRI – said:

“Budget 2026 begins the process of tackling child poverty and deprivation. While the child-related measures are well targeted, they result in a relatively small decrease in the child poverty rate as they are accompanied by the withdrawal of temporary measures. More investment will be needed to achieve government targets, but there is a very strong economic case for making this investment as the cost of child poverty to the state is estimated at 4% of GDP per annum.”

Conor O’Toole – an Associate Research Professor at the ESRI – said:

“From a macroeconomic perspective, Budget 2026 proposes strong net spending growth in a time of economic buoyancy. This risks overheating the domestic economy and leaves less space to act if a downturn occurs. Furthermore, the share of total tax coming from windfall corporation tax receipts is both substantial and increasing, while the underlying deficit —excluding these taxes — is widening. A pathway to close this underlying deficit, by making difficult choices and trade-offs, should be developed.”

[1] The fiscal stance is how much money the government puts into the economy in spending relative to how much it takes out in taxation.