Central Bank head wants 'credible' debt-cutting plan in October's budget

Central Bank governor Gabriel Makhlouf: The resilience of the State to weather future shocks will be weakened should the increases in Covid-19 spending fail to be offset by measures to bring in more tax revenues.       

October's budget should include revenue raising measures for the Government to start to cut the State's debt load after the pandemic, the head of the Central Bank has warned.

In the annual pre-budget letter, governor Gabriel Makhlouf said the resilience of the State to weather future shocks will be weakened should the increases in Covid-19 spending fail to be offset by measures to bring in more tax revenues.               

He said that a credible plan involves setting deficit-reducing targets following the Covid crisis because the economy is expected to grow quickly in the coming years, without the need for additional stimulus that could build inflationary pressures.          

Budget planning could include "measures such as broadening the tax base, reducing certain tax reliefs or changing certain tax rates", the Central Bank said.    

Mr Makhlouf also reiterated that potential windfalls should go to pay down debt, citing potential one-off revenue gains from corporate tax receipts or revenues from the sale of the Government's shareholdings in the banks.                 

The letter comes after the Department of Finance set out its economic forecasts and spending projections for the coming years in its Summer Economic Statement published in July.                    

However, Mr Makhlouf makes clear that the Central Bank is concerned the Government will lock in increases in spending on a permanent basis, even as the State faces its obligations under climate change and an ageing population.

Central Bank economists also warned of heightened risks as large levels of debt extend to the end of 2025.

The research, An Analysis of Medium-Term Risks to the Public Finances, which was written by Thomas Conefrey, Rónán Hickey, and Graeme Walsh, re-examines the threat to the Government's corporate tax revenue haul.

The economists said the projections in the Summer Economic Statement since the Government's fiscal forecasts in April "contained significant upward revisions to public expenditure plans" but provided "no new offsetting discretionary revenue-raising measures". 

They said that two-thirds of the proposed spending increases in the summer statement was accounted for by current spending "while the remainder is public investment" and leaves the economy ill-prepared for any further economic shocks that lead to reduced Government tax revenues.      

"As a result, the Government now forecasts continuing high deficits and debt until 2025," they said. "A permanent loss of corporation tax combined with a negative external shock could increase government debt to over 115% of modified national income by 2025." 

The research warns about the potential for the economy to overheat as recovery takes hold after the Covid crisis.        

"Current Department of Finance forecasts indicate that domestic demand is expected to grow at an annual average rate of 4.5% from 2022 to 2025," the economists said. 

"In an economy growing at this pace, there is a risk that additional government spending without offsetting tax increases could generate excessive inflationary pressures leading to the emergence of imbalances in the economy," they said.