The Central Bank has called on political parties and the Irish people to consider using money reserved for tax cuts and new spending to accelerate the reduction of the budget deficit and national debt.
Although the bank has forecast continued strong economic growth this year and next, its says growing uncertainty over the slowdown in China and financial market turbulence present downside risks to the outlook.
“I would hope that the next government take seriously that you have to reconcile not just public spending needs but also get back to safe levels of public debt,” the bank’s new governor, Prof Philip Lane, told an Oireachtas committee on Tuesday.
“In terms of governments and manifestos and so on, it’s a good question to ask ‘what if you’re wrong’... excessive forecasting on the best guesses is incomplete. You need to have a risk plan as well.”
At the same time, Prof Lane recognised it was very difficult for governments to says to people they could spend more or cut tax but had to reduce debt. He also accepted this raised questions around the level of public investment.
General election
The bank’s intervention comes only days out from the formal start of a general election campaign in which most parties are setting out major plans to cut tax and increase expenditure.
Government calculations suggest the next administration could deploy as much as €12 billion in “fiscal space” over five years and still comply with domestic and European fiscal rules. However, the bank says, the next administration should do more than the minimum required to comply with the rules.
Arguing that strong growth presented scope to strengthen fiscal resilience, Central Bank chief economist Gabriel Fagan said earlier on Tuesday that a more ambitious and faster pace of deficit and debt reduction was possible.
“This opportunity needs to be taken,” Mr Fagan said, adding that action was required to mitigate the risk of future boom/bust cycles and to ensure stable and sustainable medium term growth.”
“We’ree saying that serious consideration should be given to using this [fiscal] space, given the serious problems, the vulnerabilities that the economy faces. It’s a qualitative message.”
Mr Fagan said, however, that he was not referring to specific tax or spending proposals. “What we’re saying [is that] there are vulnerabilities remaining, there are risks, and one should be prudent in terms of using that fiscal space.”
Asked whether that was a message to all parties, he said it was a message not just to parties but to voters and wider society.
“The essential idea is that we’ve done a lot of progress. Tremendous achievements have been made on the fiscal side but be careful, there are risks out there, there are vulnerabilities there, so be cautious and be prudent.”
The bank issued a new quarterly forecast on Tuesday saying the Irish economy will grow at a rate close to 5 per cent for 2016, adding a “convincing recovery” is well-established on the domestic side of the economy. Although the bank also forecasts a continuation of strong growth in 2017 at a slightly slower rate, it is concerned about external risks.
“It’s really important that everyone does not overly focus on the forecast,” Prof Lane told the Oireachtas finance committee.
In addition to emerging concerns the slowdown in China, he cited concern about the situation in Brazil. While the bank’s new quarterly forecast was for strong growth, Prof Lane said it could be wrong. “We could be wrong on the upside and we could be wrong on the downside.”
The collective view in Europe was that the euro zone was advancing, bit there were big concerns on whether the adjustment in China goes smoothly.
Although the forecast represented the bank’s assessment of what would hapen on the current information, Mr Fagan said there were many uncertainties. Downside risks were linked to China but not only to it, he said.
“If we look at the other emerging markets economies there are obviously very significant downside risks there as well. Another source of risk to the economy of course is coming from financial markets,” Mr Fagan said.
“We’ve seen significant falls in stock prices so far this years .We’ve seen a lot of turbulence in oil markets and in foreign exchange markets as well. There are a lot of risks to this forecast and they are from the external point of view on the downside.”
Upgraded forecast
In its new quarterly assessment, the bank marginally upgraded its 2016 forecast. Data suggest the economy is going through a period of exceptionally strong growth which was likely to ease only modestly this year and next, it said.
Having concluded that Ireland’s gross domestic product is likely to have grown by 6.6 per cent in 2015, the Central Bank said domestic demand would continue to be the main driver of growth in 2016.
“GDP growth of 4.8 per cent is forecast for 2016, a marginal upward revision to the previous projection, while the forecast for gross national product growth, at 4.3 per cent, is marginally lower,” the bank said.
“In 2017, on the basis of forecasts of growth in trading partner countries consistent with those underlying the latest ECB macroeconomic projections and reflecting some moderation in the growth of domestic demand, GDP is forecast to grow by 4.4 per cent, with GNP projected to rise by 3.9 per cent.”
Such forecasts for GDP growth are higher than the last Government forecasts, set out in the October budget. At that point the Government forecast 4.3 per cent GDP growth for 2016 and said annual growth would come in around 3 per cent thereafter.
The forecast said risks were judged “for now” to be balanced and “tilted to the downside” for 2017.
“This reflects some upside potential from the possibility of stronger domestic dynamics and the lagged impact of exchange rate and oil price movements, offset on the downside by rising risks to the global outlook, with potential spillovers to global trade,” it said.
Of the euro zone, the bank said a “gradual and timid” recovery continues amid more challenging external conditions.
Citing concerns about the resilience of growth in emerging market economies and expectations about diverging monetary policies in advanced economies, the bank said a “gradual and timid” recovery continues in the euro area amid more challenging external conditions.
“The recovery continues to be supported by low oil prices, a relatively weak external value of the euro and a very accommodative monetary policy stance.”
However, the bank noted disappointing external demand in the euro zone notably from large emerging market economies.
“This remains a downside risk to the outlook, especially in the presence of sluggish commodity markets, tightening monetary conditions of dollarised economies with large external financing needs, and high levels of corporate sector indebtedness.
“Another potential risk relates to concerns about the resilience of growth in China, the consequences of its ongoing rebalancing, and the global consequences of the depreciation of the renminbi.”
Strong growth
The Central Bank said Ireland’s stronger growth performance has been underpinned by both the stabilising influence of the policy and macroeconomic adjustments which have been undertaken.
It also noted the the coming together of a broad set of favourable factors, which have reinforced each other to support growth.
“In particular, the stimulus to incomes from an employment-rich recovery has been augmented by both the emergence of wage growth and the further boost to purchasing power from lower energy prices.
“Growth has also benefitted from a more benign policy environment, reflected in both the easing of the pace of fiscal consolidation and continued favourable financial conditions, while additional support has been provided by the on-going improvement in household and firm balance sheets and continuing favourable conditions in Ireland’s main export markets.
“It is the positive alignment of all these factors, many of which have acted to boost domestic demand, which has helped growth to strengthen and, excepting the uncertainty related to the recent re-emergence of tensions in global financial markets, broadly supports a continued favourable outlook.”
