Minister defends Budget plans from Central Bank criticisms

Minister for Finance, Michael McGrath: "We need to be very conscious of the decisions that we make on Budget Day." Picture: Daragh Mc Sweeney/Provision

Finance Minister Michael McGrath has defended plans for additional spending in the upcoming Budget saying the Government needs to find the balance between helping people and not stoking inflation further following criticism from the Central Bank of Ireland.

With the budget set to be announced on October 10, Mr McGrath has already said there will be €6.5bn worth of new measures, with €5.25bn going to extra expenditure and €1.15bn in tax cuts.

This means core expenditure is expected to increase by 6.1%, which breaches the Government’s own spending rules that limit net increases to 5%. Funding for once-off cost-of-living measures has also been muted but not finalised. However, this total package will not be as large as last year’s.

In its latest quarterly bulletin, the Central Bank said that the Government’s plans for an expansionary budget is going to add to inflation in the short term. If the Government continues with spending above 5% in the medium term, the bank warned that it could harm Ireland’s competitiveness as it would cause inflation to keep rising.

It follows similar criticism by the Irish Fiscal Advisory Council (Ifac) who warned that the Government is repeating past mistakes by breaching their own spending rules of not increasing net spending by more than 5%.

Speaking to reporters, Mr McGrath said while inflation continues to fall there is no room for complacency.

“It is in all of our interests that we continue to allow inflation to fall. In that regard the advice by the Central Bank in relation to fiscal policy and the need to avoid stoking inflation and pushing it back up. We need to be very conscious of the decisions that we make on Budget Day,” he said.

He said it is about trying to get the “balance right” between providing support to those who need it the most and “while at the same time not going too far” and begin pushing inflation in the “wrong direction”.

"It is a delicate balance that we have to strike but it is one that we are determined to get right,” he said.

"It is true that the more the government spends than that does have an impact on inflation, but we have to balance that against considering what the needs of our society and our economy are.” Mr McGrath said the Government will be targeting additional spending towards households and businesses who need it the most.

“I think that would mean you get the best return from that investment.” 

Central Bank forecast

According to the Central Bank, the path back to lower rates of headline inflation is likely to be “gradual and uneven”.

Should there be no further energy or supply chain shocks, inflation is expected to average out at 5.4% this year. The bank is forecasting inflation to moderate to 3.2% next year and 2.3% in 2025 as energy, food and industrial goods price growth slows.

The Central Bank’s bulletin showed that Ireland’s economy, as measured by Modified Domestic Demand (MDD), is expected to slow in the coming years. Growth this year is expected at 2.9% this year before dropping to 2.6% next year and 2.3% in 2025.

On this Mr McGrath said “we are undoubtedly” seeing a weakening of the external environment and as a small open trading economy “that of course is weighing on Ireland”.

"What we are seeing now is monetary policy having an impact. Monetary policy is dampening demand across many jurisdictions,” he said.