Taxes will have to rise and borrowing to fund services be brought under control after Covid to avoid spooking the bond market, Paschal Donohoe has said.
The warning comes just a day after UK chancellor Rishi Sunak announced the country’s biggest hike in corporation tax in a generation in a bid to cover the cost of its stimulus spending.
At an event on Thursday, Paschal Donohoe said the government here will need to reduce the budget deficit over time to keep markets on side.
“The idea that deficits don’t matter, especially for a small economy without the possibility to print its own currency, is so far off the mark as to be dangerous in evaluating policy options in the future,” Mr Donohoe told an event organised by the Economic and Social Research Institute (ESRI).
Covid-19 supports should continue but the government should get ready to “manage our national finances differently” after the crisis, he said.
That could include an increase in taxes, he hinted.
“We have seen an incremental growth in where tax as a share of national income has grown, and I think it’s very likely that that steady pace will continue,” said Mr Donohoe.
He said a “broad income tax base” was key to keeping revenues stable during the pandemic, with income taxes falling just 1pc in the last year despite a much larger fall in employment.
This week the UK announced a rise in corporation tax from 19pc to 25pc by 2023, reversing EU fears that the country would try to undercut it by slashing business levies. Chancellor Rishi Sunak also announced he would be freezing income tax thresholds.
Mr Donohoe said that spending needed to be “sustainable” regardless of low interest rates and easy monetary policy.
He made the comments two days after announcing the budget deficit had swollen to around €14bn over the last year.
Ireland’s borrowing has also increased, but low interest rates mean the interest bill on that debt amounts to just 4.5pc of total revenue, a third of what it was in 2013.
“Keeping the interest bill down will depend on reducing the deficit, at the appropriate pace and at the right time, and then setting out a clear path for its reduction and for its elimination in the future,” said Mr Donohoe.
The EU advised governments this week to keep spending, indicating that it will suspend debt and deficit limits until 2023.
But while he welcome the move, Mr Donohoe said it “does not absolve us of the need to reduce our deficit over time”.
He batted away inflationary fears, saying there were “many, many other challenges that we have to deal with” that were more pressing.
European Central Bank Executive Board member Fabio Panetta said this week that the swings in bond yields were “unwelcome and must be resisted”.
The head of Germany’s central bank, Jens Weidmann, said the ECB’s pandemic bond-buying programme “comes with flexibility and we can use this flexibility to react to such a situation”.
The ECB has purchased just over €10bn of Irish sovereign debt since last March, making it the largest single creditor to the Irish government.