Analysis: Central Bank frets over fiscal policy ahead of election

The Central Bank is increasingly confident about the force of Ireland’s economic recovery but it has clear concerns about fiscal policy as the Government readies its final budget before the election.

Such anxieties mirror those of the Irish Fiscal Advisory Council and the Economic and Social Research Institute, which have already expressed scepticism about the Coalition’s plan.

Still, the bank’s assessment of economic conditions is very positive. It believes the number of people working in the State next year will eclipse two million for the first time since 2008, with unemployment averaging 9.7 per cent this year and 8.5 per cent next year. The year-end rate in each case would be lower.

Domestic demand

The third-quarter forecast sees domestic demand playing an increasingly important role, supported by improvements in the labour market which would then boost consumption. The external outlook and financial conditions are favourable. Solid investment growth is forecast, as is export growth in line with external demand.

All of this augurs well and the bank is keen to acknowledge significant improvements in the public finances.

But it also says the fruits of recovery would be better spent on debt reduction and on building up a reserve to be deployed whenever the economic wind turns.

Direct attack

The message is clear, even if the bank was careful to avoid a direct attack on the Government’s plan for a budgetary package between €1.2 billion and €1.5 billion in October.

This is seen as an act of political necessity by the Government, which is trying to steer a path between loud demands for an even bigger fiscal expansion and counter-claims for a more modest plan.

In reality the Government is trying to keep everyone sweet, beating budgetary targets while simultaneously cutting tax by up €750 million and increasing expenditure by an equal amount.

No matter what the bank and other critics say, there is no turning back from the plan. The Government sees this as a prudent course, at variance with the fiscal follies of the pre-crash era.

If its plan is cast within the pressures of the political realm, the bank’s critique is grounded more in raw economics. With the grinding legacy of the crash still with us, political considerations call for some kind of a recovery dividend for the punter. In the view of the bank, however, it would be better now to plan for the next rainy day.