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.”
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.”
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