The Central Bank has sharply increased its growth forecasts, but continues to warn that the Budget priority should be to pay down debt and improve the public finances. The economy is showing evidence of “exceptionally strong growth”, it says in its latest quarterly commentary, increasing its GDP growth forecast for this year to 5.8 per cent, compared to 4.1 per cent previously.

For next year it now expects GDP to grow by 4.7 per cent, an increase of 0.5 per cent on its previous forecasts. In an upbeat assessment of the economy, the bank says that the outlook is for a continued increases in employment and incomes as the recovery spreads through the domestic economy. It also says that there is sufficient spare capacity in the economy to allow rapid growth to continue for a period, through points out that current growth rates will inevitably slow at some stage.

However the bank sends a strong warning to the Government that the benefits of strong growth to the public finances should be used to cut debt and the deficit and reduce risks facing the economy in the future. This would reduce the vulnerability of the economy if there was a sharp slowdown in future, it says.

In a clear message to the Government as it finalises its Budget, it says that “it is imperative, from the point of view of stabilisation policy, to avoid a return to the type of pro-cyclical fiscal policies observed in the past”.; It adds: “ Past experience also highlights the danger of using windfall fiscal gains to finance long-lasting spending commitments.”