The Government needs to set more ambitious budget surplus targets in order to prevent the economy from overheating, Central Bank governor Philip Lane has advised.
The current government projection of a €350 million deficit for 2019 in particular “is not sufficiently ambitious given the cyclical conditions,” Mr Lane told the MacGill Summer School in Glenties, Co Donegal on Friday. Mr Lane suggested a surplus should be run for the next three years.
Downturn
He said running a budget surplus to reduce the amount of public debt and build up a rainy day fund “would allow the government to implement a stabilising, counter-cyclical fiscal expansion in the event of a future downturn.”
There is a risk of repeating the mistakes seen in past down-turns, which “were amplified by pro-cyclical fiscal austerity”, if fiscal buffers are not built up in good times, he said.
Budget balance targets should be revised for the period 2019 to 2021 to attain a more “cyclically-appropriate policy stance.”
The economy is approaching the limits of its capacity, he said and running a fiscal surplus now will allow for counter-cyclical easing during the next downturn.
Mr Lane said Ireland’s current budget stance is out of kilter with other small European countries which have similar unemployment rates. Unlike Ireland these countries have been running fiscal surpluses, a fact noted in the Government’s Summer Economic Statement.
There are three further reasons to set more ambitious surplus targets, Mr Lane said.
Revenues
“First, the unexpected surge in corporation tax revenues may have some one-off elements, indicating that some part of these revenues should be categorised as a windfall.
“Second, to the extent that the current low interest rate environment is not expected to persist indefinitely, a tighter non-interest budget balance offers protection against future increases in debt servicing costs.
“Third, the legacy of high public and private debt levels mean that Ireland is relatively more vulnerable to reversals compared to other countries with healthier public and private balance sheets.”
On the subject of Government investment, Mr Lane said a long-term perspective must be taken when designing public investment programmes so they can “contain overheating pressures”.
“The significant social return that may be expected on high-quality public investment pays off over many decades. A fiscally-neutral increase in public investment would deliver the long-term gains without inducing short-term overheating.”
The Governor said high-quality management in both the private and public sectors is vital to ensure long-term prosperity.
“For the public sector, recent international reports have identified scope for improvement in the management of public services and public investment projects.”
In relation to climate change Mr Lane said the international financial system must manage the contraction of the sectors which rely on carbon and work on expanding environmentally sustainable areas of the economy.
“A basic step in this direction is for enhanced disclosure of carbon exposures, such that markets, banks, investors and regulators can make better assessments of the implications of climate change for individual firms.”
