Ireland remains especially exposed to another financial shock because of the high levels of public and private debt, the open nature of the economy, and Brexit, Central Bank Governor Philip Lane has said.
And he said that the recent pan European stress tests showed the financial system also remains vulnerable.
In a pre-Budget letter to Finance Minister Michael Noonan, the Governor cautioned that the public finances are being boosted by temporary factors, including low interest rates, surplus Central Bank income and potentially a fraction of the surging corporation tax receipts.
Prof Lane said a “prudent fiscal strategy remains essential”.
He said the Government needed to set long term targets that annual budgetary decisions could be set against, and which recognises the fact that Ireland’s population is ageing and pressures will be placed on heath care and pensions.
He also said the State should set its own national target for public debt, as the international debt-to-GDP metric needs to be supplemented in Ireland’s case because of the distortions around GDP as a measure of the growth of the Irish economy.
“At both European and domestic levels, the balance of risks is clearly tilted to the downside,” Prof Lane wrote, in the letter, which has been publicly released by the Central Bank.
“Ireland is especially exposed due to the legacy of high public and private sector debt levels, the sensitivity of small, highly open economies to international shocks and Brexit-related vulnerabilities.”