Housing and infrastructure shortages risk boosting inflation and hitting investment, Central Bank governor Gabriel Makhlouf warns finance minister Paschal Donohoe, in a letter published on Thursday.
The Government has been struggling to contain a housing crisis for more than a decade while energy, water and transport are under increasing pressure as the population grows.
Mr Makhlouf highlights the housing and infrastructure squeezes among the “most immediate and pronounced threats” to the Republic’s economy in a letter to Mr Donohoe, published by the Central Bank on Thursday.
The high costs and delays in tackling the problems boost rents and inflation, driving up wages and living costs, the bank chief warns.
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Housing and infrastructure crises threaten investment, Central Bank warns
They can also stall or prevent investment, he adds.
Infrastructure is particularly important to maintaining foreign investment, Mr Makhlouf says.
This is especially the case as break up of the world economy “turns from distant risk into current reality,” he cautions.
The Central Bank governor also warns that the State depends heavily on corporation tax paid by foreign-owned firms.
The tax levied on business profits accounts for 25 per cent of the State’s revenues while multinationals pay €9 out of every €10 of that.
Corporation tax is particularly vulnerable to trade tensions or changes in other countries' policies, Mr Makhlouf argues.
“A substantial loss of corporation tax would push the budget into a deficit position,” he tells Mr Donohoe.
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Meanwhile he predicts that the Republic faces a €54.5 billion extra bill to ensure that it meets its commitment to cut greenhouse gas emissions by 51 per cent by 2030. The State will have to foot at least one fifth of that, Mr Makhlouf calculates.
He welcomes the Government’s creation of the Infrastructure, Climate and Nature, and the Future Ireland funds, which he says will aid in cutting the cost of the ageing population and meeting greenhouse gas emissions pledges.
In a speech to the Institute of International and European Affairs that echoes the letter, Mr Makhlouf told he gathering that the “growing fragmentation of the global economy” challenges the Republic’s openness, which is key to living standards.
“Building economic resilience, through investment in physical and human capital in particular, is the most effective way of helping to manage these transitions,” he said.
He maintained that the Government needs to prioritise spending on infrastructure while widening the tax base to fund the investment needed.
It should cut the cost of building infrastructure and boost the construction industry’s productivity.
At EU level, the Republic should support moves to improve the functioning of the single market, particularly for trade in services between member states.
Mr Makhlouf also advocated ensuring that policy keeps up with the need to balance innovation and competition policy, particularly as artificial intelligence changes the business landscape.
