Central Bank urges caution on tax cuts over global concerns

Intervention comes only days before Taoiseach expected to call general election

Election proposals for major tax cuts and spending increases have been questioned by the Central Bank.

The intervention by the bank, which is concerned about potential risks from the slowdown in China and volatility in financial markets, comes only days before Taoiseach Enda Kenny is expected to call the election.

The bank has called on political parties and the Irish people to consider using money reserved for tax and spending measures to accelerate the reduction of the budget deficit and national debt.

Although the Dame Street institution has forecast strong growth in Ireland this year and next, its new governor, Prof Philip Lane, said it was an open question whether pressures in Brazil and China would shake the world economy.

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“You’re about to go into election mode,” he told an Oireachtas committee. “But I would hope that the next government takes seriously that you have to reconcile not just genuine public spending needs but also the importance of getting back to a safe level of public debt, no easy task.”

Forecast error

The task for the next government, no matter who formed it, was not only to set spending and tax levels but to ask what would happen if forecasts were wrong.

Prof Lane was speaking to the Oireachtas finance committee after the bank said it expected 4.8 per cent gross domestic product growth this year and 4.4 per cent growth in 2017.

While the forecast in each year is higher than the latest Government projection, Prof Lane urged caution. “It’s really important that everyone does not overly focus on the forecast,” he said.

“The philosophy has to be that as a Central Bank, we protect the financial system by saying if the bad events happen we try and keep the system stable.

“Equally in terms of governments and manifestos and so on, I think it’s a good question to ask: what if you’re wrong?”

Official data suggests the State could deploy €12 billion in “fiscal space” for tax and spending measures over five years and still observe fiscal rules.

Debt reduction

Earlier on Tuesday, however, the Central Bank’s chief economist said the next government should do more than the minimum required. Gabriel Fagan said a more ambitious and faster pace of deficit and debt reduction was possible: “This opportunity needs to be taken.”

“We’re saying that serious consideration should be given to using this [fiscal] space, given the serious problems, the vulnerabilities that the economy faces. It’s a qualitative message,” he said.

Asked whether that was a message to all parties, he said it was also a message to voters.

The essential idea was that in spite of progress, “there are risks out there. There are vulnerabilities there. So be cautious and be prudent.”

Arthur Beesley

Arthur Beesley

Arthur Beesley is Current Affairs Editor of The Irish Times