Patrick Honohan warned Michael Noonan to avoid ‘windfall’ budget

The outgoing governor of the Central Bank, Patrick Honohan, has warned Finance Minister Michael Noonan that it is imperative to avoid a return to the type of pro-cyclical fiscal policies observed in the past.

Mr Honohan issued the warning in a letter ahead of the October 13 budget.

It coincided with recommendations to Government from the Irish Fiscal Advisory Council for a more cautious approach.

However, the budget unveiled was viewed in many quarters as pro-cyclical.

In his pre-budget letter, which was released in response to a Freedom of Information request, Mr Honohan said: “All things considered, you will be alert to the danger of using windfall fiscal gains to justify long lasting spending commitments.”

Following the budget, Mr Noonan has said he would have been more cautious if he felt there was any danger of the economy overheating.

Mr Honohan, who is due to retire next month, said: “Clearly, there has been a very significant improvement in the general government balance in recent years. But despite our expected exit from the corrective arm of the stability and growth pact this year, the fiscal job is not yet done.”

In the letter, dated August 16, Mr Honohan said balancing the structural deficit would help insulate the public finances and the economy from shocks.

He said: “Such an outcome would be supported by continued prudence in fiscal policy, particularly in the current environment of strong growth.

“The interpretation of both GDP and GNP statistics as measures of economic performance is seriously complicated by the way in which the activities of multi-national corporations are measured, and a significant part of the recent growth in these production numbers can be attributed to these distorting features.”