Central Bank urges Government to do ‘more than minimum’

The Central Bank is urging the Government to do “more than the minimum necessary” in the Budget to meet its fiscal targets and use windfall gains to pay down the national debt.

In a report this morning, the bank says markets will look more closely at Ireland in the absence of troika supervision to ensure the State continues building on the progress achieved in repairing the public finances.

“This first post-programme Budget offers the opportunity to further solidifyIreland’s reputation for creditworthiness. It is important that this opportunity is taken,” the Bank says.

Unlike recent interventions by the Fiscal Advisory Council and the European Commission, the bank does not say directly that Government should maintain its original target for a further €2 billion retrenchment in Budget 2015.

However, the bank says in its quarterly bulletin that deficit target of a 3 per cent of economic output is “not an end-point” and that the Budget should bring the deficit comfortably below that level to guard against adverse shocks.

The bank has upgraded its economic growth forecast this year by two percentage points to 4.5 per cent of gross domestic product, but says rate of growth will decline next year to 3.4 per cent of GDP. The 2015 growth forecast is only marginally ahead of the bank’s last projection.

While recent official figures show the economy growing year-on-year at close to 8 per cent in early summer, the Bank says the headline growth rate “overstates the scale of the improvement” in economic performance.

The Government is settled on a “neutral” Budget with no further spending cutbacks, no net increase in taxation and modest income tax concessions.

While not commenting directly on that, the bank says the Government to take advantage of temporary revenue surges in the short-term to reduce debt more quickly in order to ease the vulnerability arising the debt overhang.

“ Further progress in policy implementation across a range of areas will be crucial in order to reduce vulnerabilities and ensure a sustainable return to steady growth,” it says .

“With respect to the public finances, reflecting the improvement in the economy, Exchequer data have been favourable. Tax revenues have grown ahead of target and expenditure has remained broadly on track which, when combined with the projected higher level of nominal GDP, leaves the 2014 general government deficit on course to come in well below target.”

The bank adds: “Budget 2015 will be the first in a series of post-Troika budgets that will need to ensure that Ireland moves progressively towards meeting the medium-term budgetary objectives.

“Beyond 2015, it is imperative to facilitate the return of the economy to lower and safer levels of public debt. Securing debt sustainability through a sequence of primary surpluses is necessary to underpin a more durable recovery.

“Just as unexpectedly unfavourable developments resulted in unwanted increases in public debt in recent years, windfall revenue gains should be employed to reduce that debt.”