Central Bank governor Gabriel Makhlouf warned on Wednesday that rule-breaking budget spending over an extended period will aggravate inflation and hit sustainable economic growth.
The €10.5 billion Budget 2025 package, unveiled last week, marks the fourth straight year in which spending will breach the 5 per cent growth rule introduced by the Government in 2021.
“Given current conditions, the continued expansionary fiscal stance adds unnecessary stimulus to an economy at full employment,” Mr Makhlouf told the Oireachtas finance committee on Wednesday.
“Against the current macroeconomic backdrop, increasing net spending in excess of 5 per cent over an extended period implies that the fiscal stance will aggravate price inflation and wage pressures, undermining competitiveness and creating risks that could damage sustainable economic growth.”
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While the governor acknowledged that planned increases in infrastructure are necessary, they need to be carefully managed in order to avoid overheating the economy.
“To avoid this outcome, it would have been preferable if the upward revisions to public investment had been accommodated while keeping overall net spending below 5 per cent,” he said. “Undoubtedly, this would have presented difficult choices and trade-offs to be made in other areas of expenditure and on taxation.”
He said that fiscal policy has a greater role to play in countries across the euro zone than in many other jurisdictions, given that monetary policy is set centrally by the European Central Bank (ECB) for the 20-members of the single currency, that often have varying economic backdrops.
Mr Makhlouf also defended the regulator’s recent decision to disband its stand-alone consumer protection unit in January and disperse its functions among arms of the organisation that supervise various areas, from banks and insurers to investment firms.
“The new approach will make it easier to direct our supervisory resources to the areas of most risk to consumers or the system more widely. Importantly, we are taking the existing team that stood in a single consumer protection directorate and placing them where their expertise is most required, directly in supervisory directorates across banks, insurance and funds,” he said.
“‘Mainstreaming’ consumer protection activity in this way will enable us to dedicate greater attention and resources to where the particular risk is at a point in time. The new approach will allow us to do more, not less, to protect consumers.”
He highlighted that one of the bank’s three deputy governors, Derville Rowland, remains ultimately responsible for consumer and investor protection. Ms Rowland is also known to have thrown her hat into the ring for one of five full-time executive board positions being established at the EU’s new Anti-Money Laundering Authority (AMLA) in Frankfurt.
The governor said the bank will next week publish its analysis of the shortfall between the cost of flooding in Ireland and that portion of the cost which is not insured.
“We know that Ireland will face more frequent and severe floods as the effects of climate change continue to crystallise,” he said. “Climate change has implications for the economy and for the financial system, and floods in particular will impact directly on communities and consumers as well as the balance sheets of insurance companies.”
“We cannot require insurance companies to provide flood insurance cover but our analysis can help everyone to understand the risks and support the co-operation and co-ordination required from the many stakeholders involved in building flood resilience in Ireland.”
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