Coalition urged to take caution on budget spend

A strong recovery is under way, according to the Central Bank yesterday, as it reiterated a gentle warning to the Government against any potential giveaways in October’s pre-election budget.

Central Bank officials increased their growth outlook for the economy for this year and next year, saying domestic demand — including investment by firms and consumer spending — will play an increasingly important role in driving economic growth in the coming years.

In an upbeat quarterly report, the Central Bank increased its forecast for GDP growth this year to 4.1% from the 3.8% it had predicted in the spring, and projected strong growth of 4.2% through 2016, up from 3.7% previously forecast.

Central Bank chief economist Gabriel Fagan , said this growth boost means the Government’s finances are increasing strongly.

He said the Central Bank’s mandate includes providing independent advice and, for this reason, it advised that additional public funds would be best used in reducing the still-elevated level of debt.

It favours the Government paying down the sovereign debt more rapidly, rather than being tempted to just do the minimum to meet the EU’s debt-reduction fiscal rules.

Given the current state of the macro-economy, there is no need for a fiscal stimulus at this point of time, Mr Fagan said.

He said indicators suggest the so-called output gap of the economy is not exceptionally large, and building a “fiscal space” to safeguard the country against potential economic shocks would be the best approach to take.

However, the Central Bank would not be drawn on a specific number in billions of euro for what it believes would constitute an overly expansive budget.

Mr Fagan said it was up to others to decide, but that any fiscal budget measures do not automatically mean the budget would be an expansionary one, given the obligation to the EU to reduce the country’s structural budget deficit.

Finance Minister Michael Noonan detailed in his spring economic statement in April that he had additional funds of between €1.2bn and €1.5bn to play with in lower taxes and increased spending in October’s budget, the last before the general election.

Analysts say the Government could potentially have a surplus of up to €2.5bn this year, if there were no fiscal controls from Europe.

John Flynn, the Central Bank’s head of economic analysis, said while exports will continue to be a key driver, the recovery is broadening out. Domestic demand is playing an increasingly important role, while a “modest” upturn in consumer spending is also expected.

Exports figures — potentially affected in the early part of the year by contract manufacturing, where firms based here book exports in Ireland for goods made abroad — will remain strong. However, the domestic side of the economy will now drive growth, the Central Bank predicted.

Employment growth will continue this year and next, Mr Flynn said. The Central Bank predicts the average unemployment rate in 2016 will fall to 8.5% from an average rate of 9.7% this year.