Acting Central Bank chief warns of need to prepare for economic downturn
THE Government needs to start using corporation tax windfalls to create a buffer against the next downturn, the acting Governor of the Central Bank has warned.
Sharon Donnery has urged Finance Minister Paschal Donohoe to create “a clear strategy guiding the use of unanticipated revenue”.
In a speech about the potential impact of Brexit on the economy, Ms Donnery said policymakers mustn’t lose focus on wider threats.
“The global environment is uncertain, and with Brexit looming, we should be ready to respond if the risks they pose materialise.
“But at the same time, it is imperative that we are nimble and ready to cool a potentially overheating economy on the other side,” she told the MacGill Summer School in Glenties, Co Donegal.
“We must not only be prepared, but prepared to act. We must ensure the system is resilient, and continues to function into the future, come rain, hail or shine.”
The Exchequer pulled in €2.37bn in corporation tax in June alone, bringing the total take for the first six months of the year to €4.17bn.
This is 3.5pc ahead of last year – but there have been repeated warnings that it is not sustainable.
Ms Donnery noted that interest payments on our national debate are currently lower than expected and corporation taxes are higher “but neither situation should be regarded as permanent”.
“These funds should be put to work to buffer against the next downturn or crisis and not to finance current expenditure or to boost an economy which is close to capacity.
“A clear strategy guiding the use of unanticipated revenue inflows should be promptly established,” Ms Donnery said.
“Moreover, the reduction of public debt ought to remain a key priority given its very high level.
“To somewhat labour the analogy, we must ‘fix the roof while the sun is shining’.”
She said as small open economy, Ireland is “greatly exposed to the global environment”.
“Crucially, we can’t influence many of these outside factors. So we need to make sure we are resilient to them. That we are prepared.
“When global times are good, we do better. Similarly when the global economy slows down, we are affected. While we benefit from the global opportunities we need to also ensure we build defences to the risks,” Ms Donnery said.
The acting Bank chief said Ireland has made a “remarkable recovery” since the economic crash which has results in employment approaching an all-time high and wages “creeping upwards”.
However, she said people must be “wary” of the economy overheating.
Speaking about the housing crisis, Ms Donnery said everybody is “acutely aware” of the challenges and the impact on young families.
“But I have seen no evidence that more debt for these same young couples and families is the answer. More supply is.
“We have a pool of buyers chasing a limited number of properties,” she said.
“And the legacy of non-performing loans (NPLs) is a harsh reminder of what can happen when credit grows independent of incomes and fuels house prices.
“Our borrower-based measures aim to reduce the risks and hardship to households during a possible downturn or a house price shock and make them more resilient both now, and into the future.”