The Government must “anchor” its spending to strengthen Ireland’s fiscal position in preparation for what could be a permanent hit to economic output stemming from shifting US trade policies, deputy governor of the Central Bank of Ireland Vasileios Madouros has warned.
US import tariffs and the response from other trading blocs and countries constitute the “biggest potential shock to trade policy in decades”, the official, who oversees financial and monetary stability at the regulator, said on Friday.
Even with the US looking to strike deals with countries, tariffs on US imports remain at the highest levels since the 1930s, and about 25 per cent of the Republic’s exports to the world’s largest economy are in the firing line.
This could increase, however, if the Trump administration adds pharmaceutical products to its tariffs regime or if the ongoing 90-day pause in new tariffs on EU-US trade does not result in an agreement to lower duties, Mr Madouros said in a speech at University College Cork on Friday before Mr Trump’s latest threat to impose a 50 per cent tariff on all EU goods.
Unlike the shock of the Covid-19 pandemic, from which the economy recovered relatively quickly, the economist said that any permanent increase in tariffs would “likely lead to a permanently lower level of output” in the Republic’s economy.
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While the economy is entering this period of uncertainty in a strong position, the Republic’s “underlying vulnerabilities” must be managed carefully, he said.
These fragilities within the economy relate to “fiscal resilience”, he said, particularly relating to the exchequer’s reliance on corporation tax receipts.
More than a third of the State’s tax take from businesses, which is heavily reliant on a handful of small multinationals, is being spent, Mr Madouros said.
The Government has not only been breaching its own 5 per cent net spending rule but has also been spending “in excess of what has been budgeted for”, he said, exceeding budgetary ceilings.
The Coalition must “anchor” its fiscal policy so it has money to spend when the economy is flagging, rather than adding to economic demand when the wider economy is performing well, Mr Madouros said.
“Broadening the tax base remains important” for the long-term sustainability of the State’s finances, he added.
The Department of Finance said earlier this month that the domestic economy will experience a significant growth shock with up to 25,000 jobs impacted if the EU fails to secure a trade deal with the US to limit the impact of tariffs.
