Monday 22 January 2018

Don't overstate pace of the recovery, Central Banker warns Noonan

Patrick Honohan
Patrick Honohan

Gordon Deegan

Outgoing Central Bank Governor Patrick Honohan fired a warning shot to Finance Minister Michael Noonan ahead of the Budget about overstating the pace of the recovery.

In his last pre-Budget letter to the Finance Minister, Mr Honohan cautioned that the economy was not "back to pre-crisis performance".

He said measuring the Irish economy could be complicated by the activities of the multinational sector and claimed that a significant part of the growth could be put down to these "distorting" features.

"Following robust growth last year, economic indicators remain encouraging.

"However, I would be concerned that the degree and pace of the recovery be not overstated," Mr Honohan warned.

"Neglecting these measurement issues has led some commentators to think that the economy is back to pre-crisis performance.

"The employment statistics paint a more subdued picture."

The governor, who is expected to step down next month, said that although job numbers had been growing in the past three years, total employment was still more than 10pc below the previous peak.

He also warned Mr Noonan that it was imperative to avoid a return to the type of pro-cyclical policies observed in the past.

However, the Budget was viewed in many quarters as pro-cyclical, including by the ratings agency Fitch, which stated that the Budget was likely to increase economic volatility.

In his pre-Budget letter, released in response to a Freedom of Information request, Prof Honohan said: "All things considered, you will be alert to the danger of using windfall fiscal gains to justify long-lasting spending commitments.

"Distinguishing between revenue sources that can be considered as stable - such as taxes on personal income - and those which have a one-off or transitory characteristic is a challenge of which I am sure that your department is cognisant, especially given the speed at which transitory revenue sources associated with the housing bubble evaporated in 2009 and 2010."

Mr Honohan also reiterated his view that any windfall gains should be put to reducing the State's debt pile.

In the aftermath of last month's Budget, the Finance Minister Mr Noonan rejected suggestions that it was too expansionary.

He said he would be more cautious if he felt there was a danger of the economy overheating, adding that that was not the case, but he would watch it very carefully.


However, last night, Fianna Fáil's finance spokesman Michael McGrath said the governor's advice had been timely.

"Unfortunately, like similar warnings from the Fiscal Council, it was ignored by a Government whose sole focus is on securing its re-election, with no concern for the long-term impact of its policies.

"The cumulative impact of its policies over the last 12 months has been increased expenditure and tax cuts of €7.3bn."

Mr McGrath added that the Government had failed to demonstrate a clear strategy to improve public services.

Irish Independent

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