Governor Makhlouf’s pre-budget letter published

• Government supports should increasingly facilitate post-pandemic structural adjustments in the way we live, work and travel
• A credible path to a lower debt ratio over the medium term is needed
• There is a need to focus on planning for the impact of longer-term structural challenges facing the economy, including an ageing population and the need to finance the digital and carbon transitions.

The Central Bank of Ireland has today (1 September 2021) published the pre-budget letter from Governor Gabriel Makhlouf to Minister for Finance, Paschal Donohoe (PDF 3.33MB), ahead of Budget 2022. 

As the near-term impact of the pandemic eases the Governor has advised that “The focus of policy should shift from limiting the effects of the near-term shock to minimising supply constraints arising from labour market mismatches over the medium-term.”  He said this could be achieved through “targeted and effective labour market activation measures (such as re-skilling, training, apprenticeship, minimising welfare traps, etc) and facilitation moves out of longer-term unemployment and inactivity into employment in sectors with high labour demands.”

Commenting on the fiscal response to COVID-19 the Governor acknowledged that to date “the domestic fiscal policy response to mitigate the impact of COVID-19 has been warranted and proportionate.”  However, the Governor added that “a credible plan is required to reduce the public debt ratio over time to a more sustainable level, ensuring long-term resilience and the capacity to respond to future shocks.”  He wrote that the upcoming Budget should “signal clearly a sustainable path to a more resilient medium-term position for the public finances”.

This would require “clearly articulated sources of funding for permanent current expenditure increases”. He proposed that measures such as broadening the tax base, reducing certain tax reliefs or changing certain tax rates, may be appropriate to achieve sustainable and balanced long-run growth. Moreover he suggested that “any revenue windfalls – whether from unexpected corporation tax receipts or the proceeds from the sale of bank shares, for example – should be used to reduce debt levels rather than fund extra expenditure.”

The Governor warned that “in an economy already experiencing strong economic growth (as is currently projected), there is a risk that higher government spending and tax changes – as well as resulting in higher debt – could generate excessive inflationary pressures, leading to the emergence of damaging imbalances in the economy.”

In the letter the Governor acknowledged that “in achieving these objectives, it will be important to account for known structural risks to revenues and expenditure as well as creating sufficient space for public investment”.

He outlined how the “pandemic will leave a legacy of structural changes, adding to pre-existing challenges from globalisation, climate change and the transition to net zero by 2050, demographic ageing and digitalisation.  These challenges and the changes they trigger will require adjustments by households, business and policymakers.  As the immediate crisis management phase of the pandemic ends, attention should focus on planning for the impact of these challenges.  This will help to ensure that the economy is well-placed to leverage the opportunities created by structural shift while minimising the costs of transition and disruption.”

The Central Bank has also published an Economic Letter “An Analysis of Medium-Term Risks to the Public Finances (PDF 500.69KB)” by Thomas Conefrey, Rónán Hickey and Graeme Walsh.  The authors find that pressure on the public finances should ease, as the COVID-19 pandemic abates, but projected strong growth in public spending will see persistent deficits and high government debt through to 2025. At the same time, there is uncertainty as to the scale of future long-term spending pressures combined with the risk of lower government revenue from corporation tax. Against this backdrop, this Economic Letter examines risks to the public finances from further debt-funded expenditure increases, lower tax revenue or a negative external growth shock.  The analysis suggests that permanent increases in current spending should be balanced with revenue-raising measures elsewhere in the budget.