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Central Bank warns Government against pre-election budget giveaway

Generous budget measures, over and above the Government’s 5 per cent spending rule, could trigger overheating dynamics, regulator says

The Central Bank has warned of an 'overheating dynamic' from a pre-election giveaway budget. Photograph: Leah Farrell/Rollingnews.ie

Eoin Burke-Kennedy
Tue Jun 18 2024 - 00:01

The Central Bank has warned the Government to avoid a budgetary giveaway ahead of the general election.

Amid speculation the Coalition may opt to hold the election after the budget in late October or November, the regulator said it would “not be appropriate” for the Government to repeat the budgetary packages of recent years with the economy at close to full employment and real wages projected to grow.

“Such a scenario would lead to higher inflation, damaging Ireland’s competitiveness and long-term prospects for growth in living standards,” the bank said in its latest quarterly bulletin.

Asked what a giveaway budget looked like, the bank’s director of economics and statistics Robert Kelly said that if the Government continued with cost-of-living supports and other non-standard measures while trying to increase capital spending this could trigger an overheating dynamic.

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There was a danger in trying to do “too much, too quick,” he said.

In its report, the Central Bank urged the Government to adhere to the 5 per cent spending rule. The rule limits annual increases in public spending to 5 per cent, which is viewed as sustainable for the economy.

“A credible fiscal strategy, anchored in compliance with the 5 per cent net expenditure growth benchmark, is necessary to achieve an appropriate fiscal stance and have more resilient public finances,” the bank said.

The Central Bank projected the Irish economy would grow by 2.1 per cent in modified domestic demand (MDD) terms this year and by 2.5 per cent next year as inflation eases, real incomes grow and global trade picks up.

Separate data from the Central Statistics Office yesterday pointed to a bounce in exports in the first four months of the year on the back of a rebound in the pharma sector, which had slumped last year as demand for Covid vaccines and medications fell away.

“As economic activity is expected to be broadly in line with its medium-term potential, policy attention needs to more firmly turn to bolstering that potential by addressing capacity constraints and reducing structural vulnerabilities in the economy and public finances,” the Central Bank said.

On housing, the bank said that while there have been increases in the numbers of housing units completed in recent years, there was “uncertainty around the timing and scale of future increases” because of several factors including pandemic-related delays and changing deadlines for the waiver of development levies.

“Combined these have contributed to a more uncertain lag from planning permissions to commencements to when housing units are finally completed,” it said.

[ Mortgage rules spark war of words between Central Bank and ESRI ]

Nonetheless, it projected house completions would increase to a post-crash record of 35,000 units this year, rising to 37,500 and 39,500 in 2025 and 2026 respectively.

A report by the Economic and Social Research Institute due to be published in the coming weeks is expected to put the annual level of housing demand at 50,000 units.

“With likely additional demands to emerge in the crucial area of housing, it is also important to consider the investment needs to decarbonise the economy in line with legislated targets,” the bank said, while noting that estimates suggest such required decarbonisation investment out to 2030 could be 15.7 per cent higher than what is currently envisaged by Government.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times

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