Central Bank sought ‘more ambitious’ budget

The Government could have done more to build up buffers for the hard times but this week’s budget was “balanced” that hadn’t fuelled demand in a fast-growing economy.

Central Bank sought ‘more ambitious’ budget

By Eamon Quinn

The Government could have done more to build up buffers for the hard times but this week’s budget was “balanced” that hadn’t fuelled demand in a fast-growing economy.

That’s the Central Bank’s assessment of Finance Minister Paschal Donohoe’s tax and spending plans for 2019, as the regulator and watchdog issued its latest economic bulletin in which it warned the time of a potential overheating of the economy was drawing closer.

Mark Cassidy, director of economics and statistics, said that the economy wasn’t overheating at this time but experience showed the potential trigger point for increased risks occurred when Irish unemployment fell below 5%.

Increasing its GDP growth forecasts to 6.7% this year and to 4.8% in 2019, and projecting 3.7% growth in 2020, the Central Bank expects employment to grow 3% this year, and for unemployment to fall to an average rate of 4.9% in 2019, and continue to fall in 2020 to 4.7%.

The main message was the economy continues to grow at a strong pace, marked by consumption and construction growth outpacing previous growth estimates, Mr Cassidy said, adding that “clearly” the time of the economy approaching full capacity was getting closer. In the past, wages picked up strongly when unemployment had fallen to 5%, the Central Bank said, but controls were in place over unsustainable growth in bank credit with the mortgage lending rules and requirements for banks to set aside more capital during the good times to protect them from potential future shocks.

And accelerating earnings growth of 2.8% this year, up from around 2% in 2017, and rising to 3.3% in 2019 and 3.4% in 2020, were not out of line with levels that could be expected as the economy expanded, it said.

In an assessment of the Brexit white paper of British prime minister Theresa May, the Central Bank said that even the softest of Brexits under the outcome envisaged by Britain, that the Irish economy would take on some damage, meaning that the level of economic output would be lower than it would have been if Britain were to maintain a close link with the EU. Ms May’s “facilitated customs union” would depress UK import volumes by almost 11% over five years, which in turn would mean less demand for Irish goods and services.

“Overall, the simulations suggest that in the event of a Brexit agreement implied by the white paper proposals, the level of Irish GDP would be around 1.7% lower in the long run compared to a soft-Brexit baseline,” the Central Bank said. Under a hard Brexit outcome, the effect “would have a significant negative long-run impact on Irish output and employment” and GDP would be 2.9% lower than it might have been.

The Government had presented a balanced budget, which hadn’t added to demand pressures. But the Central Bank would have preferred the measures to be more “more ambitious” and for it to run surpluses this year and next that would allow the build-up of buffers to help to offset overheating risks, Mr Cassidy said.

Housing builds of 19,000 this year will rise to 28,000 by 2020, but still fall short of the levels required to meet the high levels of demand, the bank said. That implies it will take a few more years before home prices stabilise at levels that are closer to nominal increases in incomes in the economy.

More in this section

News Wrap

A lunchtime summary of content highlights on the Irish Examiner website. Delivered at 1pm each day.

Sign up

Our Covid-free newsletter brings together some of the best bits from irishexaminer.com, as chosen by our editor, direct to your inbox every Monday.

Sign up