The Government’s decision to break its spending rules for a giveaway budget may drive up inflation and risk damaging investment in the country, according to Central Bank of Ireland Gabriel Makhlouf.
Minister for Finance Michael McGrath this week announced a budget of €14 billion including a package of €2.7 billion to help households with the rising cost of living. Speaking in an interview from the IMF’s annual meeting in Morocco, Mr Makhlouf said he would have taken a “less expansionary” approach and warned the fiscal package risks undermining efforts to cool inflation.
In its 2024 budget, the Government unveiled a short term stimulus package alongside plans for a national wealth fund to bank some of the corporation tax receipts from multinationals operating in the country to prepare for future threats of population ageing and climate change.
Mr Makhlouf said he appreciated the decision to create “rainy day funds” in relation to the announcement of the Future Ireland Fund and an infrastructure and climate fund.
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“That sort of long term building of economic resilience is to be welcomed,” he said.
However, the governor was less supportive of the short-term household measures that were announced, including one-off additional welfare payments, and raised concerns about the decision to break its spending rule.
“It devalues the rule, unless you can explain and the way the Government is explaining it is that a lot of these measures are one-off,” he said.
The Government adopted a spending rule in 2021 that seeks to tie core expenditure growth to the estimated sustainable nominal growth rate of the economy, at 5 per cent per year.
Taoiseach Leo Varadkar on Wednesday defended the government’s approach to the budget after criticism from the Irish Fiscal Advisory Council. The budgetary watchdog expressed concern about the fiscal package and that the plan to breach the spending rule could risk fuelling inflation.
Varadkar in response said the rule can be changed “depending on the circumstances.”
“The risk is that expansionary fiscal policy adds to demand, essentially pushing back on what monetary policy has been doing and allows inflation to continue, if not increase,” Mr Makhlouf said.
Ireland’s unemployment rate is at its lowest in 20 years and the economy is operating at full capacity, which gives rise to concern about “expansionary fiscal policy which may not help the inflation challenge,” he said, but added that he doesn’t need to “worry” about political choices.
Overall he said that he is optimistic about the Irish economy but warned that there are “amber lights” flashing in the commercial property sector.
“I’m not worried about a recession in Ireland. I do expect a slight slowdown because when you are at capacity it’s the way the cycle would work,” he said.
“One area we’ve been focused on is the linkages between investment funds and property in Ireland,” he said. “We have been focused on commercial property. It is something we’ve got to be very vigilant about.” – Bloomberg
