Dame Street mandarins still cautious on Republic’s economy

With tax revenues running ahead of target in the 10th month of the year, the Central Bank says the Government should use windfall gains to pay down the national debt. Still, it will not say whether the Government is unwise or imprudent to plan a modest income tax cut in Budget 2015 and a €600 million spending rise.

We are more in the realm here of implicit nods than explicit entreaties. At Dame Street yesterday, the Central Bank’s head of Irish economic analysis, John Flynn, declined to express a view on tax, expenditure or any specific amount of fiscal retrenchment.

“We’re not talking in terms of absolute numbers. Our focus is on the overall effort that needs to be made,” he told reporters.

Mr Flynn offered no qualitative assessment of the measures under examination for a “neutral” budget, in which there would be no further cutbacks and no net increase in taxation. He made a point of saying the bank is not the Fiscal Advisory Council, which said two weeks ago the Government should proceed with a €2 billion adjustment on October 14th.

Windfall gains

Mr Flynn said the Government should aim to bring the budget deficit ratio “comfortably” below three per cent, but would not say by how much and did not quantify the fiscal effort required. “Really our message is that there is a need to put debt on a lower and safer path and that there is an opportunity to do this now because there are windfall gains in revenue which may be temporary and these should be used to do that,” he said.

The Central Bank recognises exceptionally strong growth in spring and early summer, when second-quarter GDP accelerated year-on-year by 7.7 per cent. However, it says the headline figure “overstates” the improvement. With surging exports a prime force, the bank pinpoints the “largest driver” of the export performance as a technical change in national accounting rules at an international level.

‘Irish goods’

In respect of Irish corporate entities, export goods are now classified as “Irish” until the time they are sold regardless of whether they are actually processed in Ireland from component to final product for sale. This means Irish export figures now reflect goods made in China for an Irish entity which are sent from China to another country without ever passing through Ireland.

While the impact of this technical change remains under examination by experts, the Central Bank is cautious as to the underlying picture. Such caution is seen in its reluctance to upgrade its 2015 growth forecast by more than 0.1 percentage point, to 3.5 per cent. With this year’s growth forecast up two percentage points to 4.5 per cent, Mr Flynn said the bank never previously introduced an upgrade of such magnitude. He said Ireland remains a relatively high-cost country, and said the Government must ensure the recovery does not lead to a wage or price rebound.