Central Bank questions budget giveaway plan

Regulator’s chief economist says Ireland probably does not need fiscal stimulus

Central Bank chief economist Gabriel Fagan said it was hard to make an argument for stimulus in an economy growing at 4.5 per cent. Photograph: Alan Betson

Central Bank chief economist Gabriel Fagan said it was hard to make an argument for stimulus in an economy growing at 4.5 per cent. Photograph: Alan Betson

 

The Central Bank’s chief economist has questioned the need for additional stimulus in a strongly growing economy, as the Government prepares to unveil €1 billion of extra public spending and tax cuts in Budget 2017 next week.

“In view of the current state of the economy it’s very hard to argue the case that the economy needs fiscal stimulus,” Gabriel Fagan, the chief economist, said on Thursday at the publication of the bank’s latest quarterly bulletin.

“An economy growing at 4.5 per cent, [with] unemployment coming down, is this an economy that needs a fiscal stimulus? Probably not.”

Delivering what are likely to be the Central Bank’s last public comments before what is set to be a third expansionary budget in a row, following about €30 billion of austerity measures during the financial crisis, Mr Fagan welcomed that the Government’s plans are within EU fiscal rules.

The bank shaved its forecasts for personal consumption, exports and overall economic growth for this year in the bulletin and warned risks to these projections “remain clearly tilted to the downside” as a result of Brexit.

Unchanged

The organisation lowered its forecast for gross domestic product (GDP) growth for this year by 0.4 percentage points to 4.5 per cent and left its 2017 projection unchanged at 3.6 per cent, having downgraded its estimates more materially in July in the wake of the surprise UK vote.

The latest projections are based on a euro-sterling rate of 84p. However, the euro surged to a fresh five-year high of 88.5p on Thursday, marking a 15.5 per cent surge since the Brexit referendum, and some analysts predict the rate may touch 90p by the year end.

The bank’s head of Irish economic analysis, John Flynn, said that if the current rate persisted it would have some impact on future forecasts.

However, he added: “We’ve seen over a long period of time the economy demonstrate considerable flexibility and it’s able to deal with the sterling rate at quite different levels. The Irish economy is a much more flexible economy now than it was at various times in the past, when sterling was a challenge for us.”

The bank maintains that underlying demand for products and services in trading-partner countries outweighs foreign-exchange rates. While recent UK data suggested the British economy is faring better than feared after the Brexit vote, Mr Fagan, said it was “far too early” to determine the real impact of the decision on the world’s fifth largest economy.

Debt goals

Meanwhile, Mr Fagan said that although Government debt has fallen from a crisis-time peak of 123 per cent of GDP to 80 per cent as of the first three months of this year, the State should set its own long-term debt goals. He suggested these needed to be more ambitious than a debt ratio of 60 per cent of GDP, which EU countries are required to aim for at a minimum.

A ratio, set mainly with larger economies in mind, is “probably not appropriate for Ireland, ” Mr Fagan said, as GDP growth tends to be skewed by the activities of multinationals.

He declined to say what sort of measurement Ireland should target, as the Central Statistics Office and Irish Fiscal Advisory Council (IFAC) review how best to provide insight and understanding of the economy in light of revelation in July that GDP soared by 26 per cent last year.

Separately, IFAC has endorsed the Department of Finance’s economic projections for this year and next ahead of the budget. The Minister for Public Expenditure and Reform Paschal Donohoe said at the Construction Industry Federation annual conference that the budget will include some measures sought by Fianna Fáil.