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Home»Economic News»Ireland’s central bank chief warns Dublin against pre-election giveaways
Economic News

Ireland’s central bank chief warns Dublin against pre-election giveaways

July 4, 2024No Comments4 Mins Read
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Ireland’s central bank chief has cautioned the country’s new finance minister against pre-election budget giveaways that could fuel inflation, highlighting the growing concern among European rate-setters about member states’ fiscal policies.

Gabriel Makhlouf told the Financial Times that he would deliver a strong message in his annual letter to the finance minister this week, warning that overspending on measures to address the high cost of living could exacerbate the inflation problem.

Ireland has been running significant budget surpluses due to a substantial inflow from corporation tax, primarily paid by global technology and pharmaceutical companies with a presence in the country.

The government, set to update its economic outlook next Tuesday, is projecting an €8.6bn surplus for this year.

Column chart of Forecasts for Irish general government fiscal balance (€bn) showing The Irish government expects an €8.6bn budget surplus in 2024

Finance minister Jack Chambers, appointed late last month following the nomination of his predecessor Michael McGrath as Ireland’s European commissioner, stated that no decisions had been made regarding policy measures.

Chambers, 33, mentioned in an interview with Ireland’s RTÉ radio on Thursday that the budget reveal date of October 1 was not a precursor to an upcoming general election, which must be held by March 2025.

In June, Ireland’s inflation rate dropped to a three-year low of 1.5 per cent, below the Eurozone average of 2.5 per cent. The Irish central bank indicated last month that the rate had decreased more quickly than anticipated due to a decline in energy prices, although it cautioned that inflation in the services sector remained high.

Line chart of Inflation (using harmonised CPIs, %) showing Ireland has one of the lowest inflation rates in the Eurozone

The forecast now predicts headline inflation of 2 per cent this year, down from 5.2 per cent last year, with estimates of 1.8 per cent next year and 1.4 per cent in 2026.

Monthly consumer price inflation has been falling since mid-2022, peaking at over 9 per cent — the highest since the 1980s.

However, Makhlouf highlighted the risk of a resurgence in inflation, particularly if the government implements measures to address the cost of living in an election year, similar to the temporary tax relief on mortgages introduced last year.

During the European Central Bank’s annual conference in Sintra this week, Makhlouf emphasized the importance of fiscal policy supporting monetary policy rather than the other way around.

Column chart of Irish government tax revenue, Jan to Jun of each year (€bn) showing Ireland’s revenue has been boosted by bouyant corporation tax receipts

Data released on Wednesday indicated that Dublin has substantial financial resources.

Corporation tax receipts surged 38 per cent in June to €5.9bn compared to the previous year, reaching €12.2bn in the first half of the year — a 15.4 per cent increase from the same period in the previous year.

Chambers, however, noted the volatility of these receipts and emphasized the government’s commitment to a “sensible” and cautious approach.

He downplayed the likelihood of repeating the extensive cost-of-living assistance provided in previous budgets.

Line chart of Share of Irish corporation tax receipts from top 10 companies (%) showing Global tech and pharma companies based in Ireland have provided a huge inflow of tax revenue

The remarks by Ireland’s central bank governor, who is a member of the ECB’s rate-setting governing council, underscore the increasing worries among policymakers about signs of “fiscal slippage” by several Eurozone governments, including France and Italy, which are maintaining high deficits and debt levels.

Makhlouf suggested that Ireland should utilize its budget surplus to address major transitions such as demographics, climate change, and digitization.

Ireland is in the process of establishing two sovereign wealth funds to manage “windfall” corporation tax receipts and tackle pension, infrastructure, and climate challenges.

The largest fund, the Future Ireland Fund, aims to accumulate €100bn by 2035 and will be accessible from 2041 to support pensions, health expenditure for an aging population, decarbonization, and digitization projects — a move applauded by Makhlouf.

The Irish government recently warned that the increase in age-related expenditure in Ireland between now and mid-century is projected to be greater than in any other EU member state.

With Ireland’s population aging rapidly, the country anticipates having two working-age individuals for every person over 65 by 2050, down from the current ratio of four.

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The canine swiftly dashed through the park.

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