Business Irish

Monday 21 October 2019

Departing Lane backs tax hikes to build surplus

Governor also defends increase in Central Bank staffing costs as he prepares to take up role in Frankfurt

Outgoing Governor of the Central Bank of Ireland Philip Lane. Photo: Bloomberg
Outgoing Governor of the Central Bank of Ireland Philip Lane. Photo: Bloomberg

David Chance

Philip Lane fired a parting shot at the Government in his final public appearance as Central Bank Governor yesterday, with a call to consider higher taxes to build-up a financial buffer against shocks.

The outgoing Governor said Ireland needed to run a significantly larger budget surplus and that one way of doing it would be by raising taxes.

Finance Minister Paschal Donohoe recorded the first budget surplus since before the financial crisis last year and is aiming for another surplus this year, but of just 0.2pc of gross domestic product.

Prof Lane said economic conditions mean the Government could spend and run a budget surplus.

"If you have unemployment of 4.6pc and you want to do more public investment and you want to hire more public sector workers for health, for education and so on, that's a reasonable political choice," said Prof Lane, who has been appointed as Chief Economist at the European Central Bank.

"But if you want to do that without generating overheating you have to raise revenue to more than offset that," he warned yesterday, in his last public appearance as the head of the Central Bank of Ireland.

"Our advice to the Government is to run sufficient surpluses during phases of good economic performance, in order to enable counter-cyclical fiscal measures in the event of a future adverse shock," he said.

That discipline was the key to avoiding damaging austerity in a downturn, he said.

In a wide-ranging briefing ahead of taking up his new role as ECB chief economists, Prof Lane outlined progress on the tracker mortgage scandal, including how €647m was returned to 39,800 affected bank customers.

The continued reduction of bad loans by the banks, increasingly through controversial portfolio sales is important to building resilience, he said.

The Central Bank itself has seen staffing levels increase by a third and they will hit more than 2,000 this year, and those staff costs have been inflated by recent public sector pay rises.

Prof Lane said that the bank had been understaffed and had to cope with issues like Brexit and an explosion in the size of the financial sector, especially the funds sector.

"A lot of the work we do requires people with high skills," he said, when asked about pay levels.

Despite growing concerns over the increasing scale of the offshore financial sector here and its increasing reach into the domestic economy as so-called 'vulture funds' buy up bank mortgage loan books and invest in the commercial and retail property sector, Prof Lane said Central Bank oversight was solid.

"As the financial system becomes less bank-based that is a good development, we can't have this exclusive reliance on banks," he said, adding that the new institutions could potentially increase competition and reduce costs for borrowers.

There has been a rising tide of criticism from politicians over the role of the vulture funds and "cuckoo funds" which not only buy up debt, but also entire housing developments. Critics say this has put the prospect of buying a property beyond the reach of many, especially with Central Bank rules that restrict mortgage lending.

Prof Lane defended the mortgage rules, saying they had reduced the risk of a bust.

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