The Central Bank has backed EU calls for a cautious Budget this year. In its summer bulletin, the bank has warned that a give-away pre-election Budget from the Minister for Finance, Mr McCreevy, would increase the risks of a hard landing for the Irish economy.
According to the bank, inflation could turn out to be 5 per cent while growth will slow to 6.5 per cent this year and to around 5.5 per cent in 2002, following growth of close to 10 per cent in gross national product last year.
Dr Michael Casey, assistant director general at the bank, said: "If you leave it to the market, it is quite a harsh means of slowing the economy and increases the chances of a hard landing . . . We would prefer to see the economy slowing using fiscal and incomes policies, which could ensure we do not have a hard landing."
Dr Casey added that the bank would advise the Minister closer to the Budget and would call for "cautious discretionary tax and spending policy". It would warn that the Exchequer surplus should not be eroded and that the Government should be wary of injecting further demand. Both tax cuts and spending increases added to demand, Dr Casey noted. There was also a real risk of overshooting on inflation and wages. "It does not look like wage growth will slow down, so most of the burden is on fiscal policy."
Economic director Mr Tom O'Connell said the bank's overall position was close to the EU's broad economic policy guidelines, under which Europe has asked Mr McCreevy not to increase spending further.
It predicts inflation could turn out to be 5 per cent, although all the risks are on the upside. Its official forecast for inflation is an average of 4.75 per cent, up from 4.5 per cent in its spring bulletin.
Dr Casey said this underestimated price pressures in the economy. He pointed to another "much broader" measure, the GNP price deflator, which includes costs such as new house building. This shows that prices are actually running at around 7 per cent. "Inflation has not gone away," he said.
There was also hidden or repressed inflation in the increasing problems of congestion, which have worsened the quality of many services.
He added that the gap between Irish and European inflation would stop narrowing. "European countries will get their acts together, but there is more of a question mark about our performance."
According to the bank, interest rates in Europe are still too low for Irish circumstances. The bank is still worried about credit and mortgage growth as well as money supply.
Overall, according to Dr Casey the economy is in "good heart", although signs of a slowdown are now evident. Labour shortages, the US slowdown and foot-and-mouth were all contributing to this. However, the impact of foot-and-mouth had been less than the bank feared. As a result, it is revising up its estimate for growth this year to 6.5 per cent from 6 per cent at the time of its spring bulletin.