Vasileios Madouros, the Deputy Governor of the Central Bank, has expressed his concerns over potential economic overheating if the forthcoming budget includes significant tax reductions or surplus spending beyond 5 per cent. In his view, such actions could fuel economic disparity within the country.
Madouros, whose role covers monetary and fiscal stability, underlined the necessity of adhering to the 5 per cent rule during the October budget planning, especially considering that the employment market is nearing its cap. This regulation restricts the annual rise in public expenditure to a sustainable economic rate of 5 per cent. The government’s scheduled increase in spending for the 2025 budget will be revealed in the impending Summer Economic Statement.
Furthermore, Madouros cautioned against an impending danger of commodity price escalation due to geopolitical instability in the Middle East and potential future trade fragmentation, asserting these as the top external threats Ireland could face. He emphasised that unnecessary economic demand could lead to national imbalance but noted that strategic investment could lessen supply constraints.
The 5 per cent spending rule is a crucial “fiscal anchor”, particularly in light of Ireland’s disproportionately high GDP figures making the imminent EU fiscal regulations less applicable in the country’s context.
In recent publications, the Central Bank has drawn attention to the potential financial threats presented by a disorderly price correction in the country’s commercial real estate sector, which has been most affected by the swift escalation in interest rates.
In the face of war, inflation, and simultaneous hikes in interest rates, Mr Madouros acknowledged the resilience of the global financial system and stated that while there is a significant global disinflationary trend, volatility remains due to trade fragmentation and geopolitical instability. He foresees ‘bumps in the road’ and urges for continued caution.
Earlier this month, the International Monetary Fund cautioned that the brewing conflict between the United States and China has already negatively influenced the trade exchanges among nations associated with each group. This issue may escalate quickly if Donald Trump, the US presidential candidate, triumphs in the upcoming November elections.