The expansionary policy pursued by the former Minister for Finance, Mr Charlie McCreevy, between 2000 and 2002 has increased the danger of "significant economic disruption" in the future, particularly in the housing market, three Economic and Social Research Institute (ESRI) economists have warned. Cliff Taylor, Economics Editor, reports.
The Government must be prepared to use budget policy to manage national economic problems such as an overheating housing market, they said in a paper delivered to yesterday evening's opening session of the annual Kenmare Economic Workshop.
Within the monetary union, there is no domestic control of interest rates but the three economists - Ms Adele Bergin, Prof John FitzGerald and Mr Danny McCoy - argued that the Government must be prepared to use fiscal policy instead. Big tax cuts and Government spending increases between 2000 and 2002 were inappropriate at a time of already rapid growth, adding to pressure on wages and pushing up property prices. This could leave the economy exposed in the event of an external shock, such as a significant US recession.
In particular, the Government should have acted to cool the housing market, they argue. It could have eliminated mortgage interest relief, or even taxed mortgage interest payments - effectively a surcharge on those investing in housing, the paper said.
Taking this route a few years ago, when the ESRI first called for it, would have limited the surge in house prices, according to Prof FitzGerald.
Now, with signs that house prices were peaking, the Government would need to be careful. However, a postponement of mortgage interest relief, perhaps for a period of a year, would still be an option worth considering, he said, although politically such a move seemed unlikely.
Had Ireland not joined EMU, interest rates could have risen to 10 per cent or more in the late 1990s, the ESRI paper points out.
This theme was also taken up in a paper from NUI Maynooth economist Dr Jim O'Leary. Interest rates could have been in double digits from 2000 to 2002 and be 4.7 per cent now - as opposed to the ECB-set rate of 2 per cent, he said.
Dr O'Leary said that there was a strong case for revising the ECB's inflation target, currently 2 per cent, to 2.5-3 per cent. The current low target had resulted in Germany flirting with deflation.
The "one size fits all" monetary policy not only makes it hard for countries to deal with shocks, he argued, but can in itself be destabilising, as in Ireland where "inappropriately low interest rates" have fuelled inflation.
Mr Marc Coleman, a former European Central Bank economist, delivered a paper arguing for reform of the Stability and Growth Pact, the controversial budgetary rules for countries within monetary union. Reform could happen while still sticking to the original guidelines of a maximum 3 per cent budget deficit and a ceiling of 60 per cent on debt to GDP ratio, he said.
Mr Coleman called for a loosening of the definition of the "exceptional circumstances" under which the 3 per cent rule could be broken, to allow countries some latitude when GDP growth was negative.
Countries with low debt ratios should be given more latitude in budgetary management, while those with high ratios should be told to tighten policy to reduce their debt urgently. The rule that budgets must be kept "close to balance of in surplus" could also be relaxed for low debt countries.
To promote confidence in the market, the European Central Bank could also have a role in policing the pact, he said, indicating to the markets that interest rates could rise if budgets were too loose.
