Govt’s move to increase spending above 5% will aggravate inflation, Central Bank Governor says
The Governor of the Central Bank has the Government’s decision to increase spending above 5% over an extended period will aggravate price inflation and wage pressures.
Gabriel Makhlouf said given current macroeconomic conditions, the continued expansionary fiscal stance adds unnecessary stimulus to an economy at full employment.
The situation will undermine competitiveness and create risks that could damage sustainable economic growth, the Central Bank boss told the Oireachtas finance committee in his opening statement.
He said increased public investment will be needed over the coming years given known deficits in housing and to meet long-term challenges linked to the climate transition.
“So while the projected increases in public investment are necessary, careful management of the overall fiscal stance is needed to avoid overheating,” he told the committee.
“With the economy already at full employment, there is a risk that increasing public investment on the scale envisaged fuels overheating pressures and results in poor value for money.”
“To avoid this outcome, it would have been preferable if the upward revisions to public investment had been accommodated while keeping overall net spending below 5%.”
“Undoubtedly, this would have presented difficult choices and trade-offs to be made in other areas of expenditure and on taxation.”
Mr Makhlouf also said essential change outside of fiscal measures are needed in broader policy areas to ensure additional Government spending leads to real improvements in services and that infrastructure investment is delivered efficiently.
“This includes in particular addressing delays and bottlenecks in the planning system, in the building regulation process and in construction,” he said.
“Progress in these areas would also help to further incentivise and crowd-in private investment.”
Mr Makhlouf said the Irish economy continues to grow at a strong pace supported by buoyant domestic activity.
But he said challenges to maintaining such performance are becoming more evident.
“Stronger than expected growth, over and above the economy’s potential rate, has brought into sharp focus domestic supply and infrastructure constraints,” he said.
“These, in turn, present a situation where globally-determined inflation in Ireland is declining substantially, while more domestically driven inflation, as reflected in services price inflation, remains significant at around 4%.”
Separately, the Governor also defended the Central Bank’s decision to abolish its consumer protection directorate as a standalone entity.
Mr Makhlouf said consumer protection remains a core part of its responsibilities.
But in order to continue delivering on its mandate in an increasingly complex environment and to implement its updated Consumer Protection Code, the bank needs the right operational approach internally.
“This includes moving to an integrated framework where, at an operational level, directorates with oversight of banks, insurance companies and capital markets will be responsible for the supervision of all the functions of their respective sectors (as opposed to separate directorates undertaking supervisory activities for consumer protection, prudential regulation and market supervision),” he said.
“The new approach will make it easier to direct our supervisory resources to the areas of most risk to consumers or the system more widely.”
“Importantly, we are taking the existing team that stood in a single consumer protection directorate and placing them where their expertise is most required, directly in supervisory directorates across banks, insurance and funds.”
He added that this “mainstreaming” of consumer protection activity will enable the regulator to give greater attention and resources to where the particular risk is at a point in time.
“The new approach will allow us to do more, not less, to protect consumers,” he said.