The Irish Central Bank has cautioned the government against implementing a generous budget as the general election looms. Amidst whispers that the Coalition might schedule the election following the budget in late autumn, the regulating body advised that copying recent years’ budget packages, given the current near-full employment and forecasted wage growth, would be unwise. This could lead to a spike in inflation, undermining Ireland’s competitive edge and potentially stunting growth in living standards, as per the bank’s recent briefing.
Robert Kelly, the bank’s director of economics and statistics, suggested that persisting with life-cost supports and other unconventional measures while increasing capital expenditure could generate an overblown dynamic. Attempting to do an excess swiftly poses a risk, he cautioned.
The bank, in its report, encouraged adherence to the 5% spending rule. This restricts the annual surge in public expenditure to 5%, a rate that the economy can maintain. A convincing fiscal approach in accordance with the 5% growth standard is necessary to fortify the fiscal stance and ensure resilient public finances, the bank stated.
It predicated that the Irish economy will see a 2.1% growth in Modified Domestic Demand (MDD) terms this year and a 2.5% growth in the coming year, assisted by inflation reduction, income enhancement, and a boost in global trade.
Recent findings from the Central Statistics Office indicate that the initial four months of this year saw a resurgence in exports, primarily due to the pharmaceutical sector rebounding after a slump last year due to diminished Covid vaccine and medication need.
The Central bank stressed the need for policy focus on bolstering economic activity by mitigating capacity constraints and de-escalating structural vulnerabilities in the economy and public finances.
On the housing front, the bank expressed uncertainty around the timing and scale of future increases in housing completions due to a number of factors, including pandemic-induced delays and adjustments in development levy waivers.
The uncertainty from the time planning permissions are granted to when housing units are eventually finished has been exacerbated as a result of a multitude of factors, according to a statement. There has been a verbal tussle between the Central Bank and ESRI over the rules regulating mortgages. Despite these uncertainties, the prediction is that house completions will surge to a post-crash high of 35,000 units this year, with a further increase to 37,500 and 39,500 predicted for 2025 and 2026 respectively.
A forthcoming publication from the Economic and Social Research Institute is expected to indicate that the annual demand for housing could be as high as 50,000 units. The bank also highlighted the importance of considering the investment required to decarbonise the economy, which is a key sector apart from housing. The bank also stated that the investment needed for decarbonisation towards 2030 may actually be 15.7% higher than what the government currently estimates.