Monday 23 July 2018

Fiscal space balloon is losing altitude

If we end up in crisis again it will be because we have made the same mistakes, writes Colm McCarthy

Central Bank chief economist Gabriel Fagan
Central Bank chief economist Gabriel Fagan
Colm McCarthy

Colm McCarthy

The fiscal space balloon has been losing altitude since its release during the election and the Exchequer figures for the first quarter bring it even closer to earth. There was another big overshoot on the health budget and the earnest discussions in Government Buildings are about schemes to dispense largesse which does not exist.

Six weeks after the election there is no sign of a stable government. Populist pressures on the public finances have been building and the absence of a government encourages further demands. The latest is the push for public service pay increases. Every political group appears to favour easier mortgage credit and have been leaning on the Central Bank to relax the rules introduced last year. Some news media have even been linking the two issues, justifying pay pressure as a reflection of the loan-to-income limit in the mortgage rules. The circularity is complete and a dysfunctional housing policy is to be kissed better with easy credit and pay inflation.

The crash in 2008 had its principal source in the credit bubble and subsequent insolvency of the banks. The result was the State's inability to fund itself and resorting, for the first time since Independence, to rescue by official lenders, the IMF and European institutions. A factor contributing to this disaster was the failure to control public spending through the bubble years, including the public pay bill. If Ireland ends up once again in a financial crisis, a repetition of the same failures is the most likely source. The news outlets championing a repeat performance have short memories. Senior public servants have issued cautions against a repetition of these two policy errors.

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