Central Bank publishes pre-Budget letter to Minister for Finance

The Central Bank of Ireland has today (5 July) published the annual pre-budget letter (PDF 1.45MB) from Governor Gabriel Makhlouf to the Minister for Finance.

Governor Makhlouf said: “The Irish economy has rebounded well from the economic effects of the pandemic and Russia's invasion of Ukraine. Swift domestic policy action was a major contributor to this rebound, with little sign of scarring. 

“The economy has moved to a new phase as activity is expected to be broadly in line with its medium-term potential.  These generally favourable conditions provide a good backdrop for attention to turn more decisively towards strengthening that economic growth potential. Budget 2025 and the medium-term direction for fiscal policy that Government must set are key to achieving this.

“Striking the right balance to avoid the risks of overheating and damaging the competitiveness of the economy is necessary, so that it can deliver sustainable growth in living standards for the community over the longer-term. By their nature Budgets are about the Government’s fiscal policy, the choices being made on the public finances and the specific decisions on the allocation of resources. They are also important milestones for economic policy-making in general and for the Government to lay out its proposals for longer-term structural reform in particular. 

“A significant part of achieving an appropriate fiscal strategy is establishing a credible anchor for the conduct of fiscal policy through the cycle.  Recent reforms to the EU economic governance framework achieve this only partially in the Irish case.  While the setting and oversight of new medium-term fiscal structural plans is welcome, it remains necessary for an appropriate national fiscal rule to complement the provisions of the Stability & Growth Pact. The Government established such a rule in 2021, whereby increases in Exchequer spending would not exceed 5 per cent each year without countervailing new tax measures.  Limiting net expenditure growth to the nominal trend growth rate of the economy, which at the time establishing the rule was estimated at 5 per cent by your Department, has the potential to be an appropriate and credible anchor for fiscal policy. It is important that the rule is complied with.

“Policy choices should strive to reconcile short-term priorities with long-term objectives. Addressing structural vulnerabilities, maintaining an appropriate fiscal stance and sustainably delivering on the necessary rise in public capital investment in the coming years has to be achieved alongside choices on current spending to maintain or enhance existing levels of public services. Given increasing demands on, and relative priorities for the public finances, measures to broaden the tax base (such as recommended by the Commission on Taxation) and increase government revenue as a share of national income are increasingly unavoidable. 

“In the short run, this could help to guard against inflationary pressures while public capital spending is increased.  Longer-term, with material uncertainty over the sustainability of current revenue from corporation tax and concentration risks in other revenue sources, new revenue-raising measures would help to create a more sustainable tax revenue base and more resilient public finances with which future fiscal challenges can be addressed.”