Central Bank governor Philip Lane has called for a radical resetting of a key debt reduction target for the State, suggesting the traditional debt goal sanctioned by the EU does not work that well for the vulnerable Irish economy.
The idea was floated in a letter the Central Bank governor sent to the minister of finance ahead of the budget.
This year, for the first time, the Central Bank has publicly released the letter — which was sent on August 6 — as part of the regulator’s drive towards achieving increased transparency.
Mr Lane also said in the letter that a part of the corporate tax revenues, which have surged over the past 12 months, may be “a temporary” phenomenon and cannot be relied on in planning for future budgets.
Despite the challenges set by the UK’s decision to leave the EU, he projects the Irish economy will expand this year and in 2017, while debt levels have continued to fall across the economy.
The banking system has strengthened, even though the stress tests by the European Banking Authority released in late July showed the Irish “financial system remains vulnerable in the event of a downturn and/or a deterioration in the international financial environment”, he said.
The governor said the Government may need to fashion long-term debt targets that are fitted to Irish conditions.
The letter specifically questions whether the 60% debt-to-GDP target — a pillar of the EU’s fiscal oversight regime — is low enough in Ireland’s case because of the country’s vulnerability to economic crises.
Without specifying a target, Mr Lane said “there are compelling reasons to develop a national target” that is “materially below” a level that is more suitable for “a large, more stable economy”.
The “statistical issues” surrounding the measuring of Irish GDP make the new measure more necessary.
Under Eurostat rules, the level of Irish gross debts instantly slumped to around 80% of GDP after the CSO applied large revisions to the GDP levels because of the activities of a small number of multinationals.
“Let me offer a few other observations on budgetary policy,” the letter goes on.
“First, it is important to differentiate between temporary and permanent influences on the trajectories for revenue and expenditure.
“While the volatility of the Irish economy does not make it easy to calculate the underlying sustainable path for tax revenues, it would be prudent to assume that some fraction of the recent surge in corporation tax revenues might be temporary in nature.”
Exchequer figures published last week confirmed corporate tax revenues were again running strongly for a second year, even though a question mark was again raised about the strength of Vat receipts.
In 2015, revenues from corporate tax receipts set a new record, bringing in €6.87bn, almost €2.3bn more than was anticipated.
New tax arrangements by large multinationals have helped drive the level of company revenues collected by the Government.
The letter also said the exchequer could not rely on other non-tax sources of revenue, including large transfers of surplus income generated by the Central Bank.
A spokeswoman for the Department of Finance said the submission would be taken into consideration by the finance minister.
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