Monday 26 September 2016

Central Bank warns against loose Budget amid 'downside risks'

Published 30/07/2015 | 02:30

Central Bank chief economist Gabriel Fagan
Central Bank chief economist Gabriel Fagan

The Government should not pursue "expansionary" budgets for the moment as the economy is still vulnerable to shocks, according to the Central Bank.

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In its latest Quarterly Bulletin, the Bank said it revised up GDP growth this year and next year to 4.1pc and 4.2pc.

That would represent an increase of 0.3pc and 0.5pc.

The Bank said it was clear now that the "strong recovery of the Irish economy has continued into the first half of 2015", however it added that the economy was still vulnerable to "downside risks" particularly internationally.

The Central Bank highlighted the risks posed by the gyrations in Asian economies at present, particularly in China, where the stock market has seen huge losses in recent weeks.

As a result of those risks, Central Bank chief economist Gabriel Fagan said there was "no need" for expansionary fiscal policy at present. His comments came even as Finance Minister Michael Noonan prepares a Budget that will have spending increases and tax cuts of between €1.2bn and €1.5bn.

Mr Fagan went on to warn on the dangers of "pro-cyclical" fiscal policy and the problems it has caused in the past.

"Indeed, with strong growth in prospect, it is important that the fiscal stance does not exacerbate cyclical pressures," Mr Fagan said.

"Ireland's past experience demonstrates the damage that can be caused by pro-cyclicality in policy and of the importance of resisting the temptation to consume unanticipated surplus revenues.

"Given the continuing high level and burden of public debt, it would be best to use such revenues to accelerate debt reduction, leaving the public finances better positioned to address future challenges," the Central Bank added.

"Looking ahead, the strong growth outlook implies that there is no need for fiscal policy to support economic activity and, importantly, also provides an opportunity to move ahead with fiscal consolidation and debt reduction in favourable circumstances," the Bank said.

Speaking to reporters, Mr Fagan emphasised that it was not for the Central Bank to say publicly if the planned budget was excessively loose.

Mr Fagan also revealed that the Central Bank and other government bodies are "actively planning" for a possible exit by Britain from the EU.

A "Brexit" would undoubtedly have major implications for the Irish economy, but how that process would play out exactly is yet to become clear.

The euro has fallen by around 10pc against sterling in the year to date, something that was "undoubtedly positive" for Irish exports, however as the profile for exporters here has changed that impact is less than it would have been in the past.

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