Central Bank governor Gabriel Makhlouf has called on Minister for Finance Jack Chambers to stick to the spending rule the Government set in 2021 – but has since repeatedly broken – in the upcoming budget in order to avoid overheating the economy.
The rule is supposed to limit Exchequer spending growth to 5 per cent each year unless additional expenditure is offset by new tax measures. Mr Makhlouf said that widening sources of tax revenue was “increasingly unavoidable” to fund growing spending demands and priorities.
“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,” Mr Makhlouf said in his annual pre-budget letter to the Minister for Finance of the day. “It is important that the rule is complied with.”
The Minister said on Thursday that Budget 2025 would take place on October 1st, a week earlier than usual – though he denied this was a signal an early general election was being planned. The next election must be held by early March.
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Mr Chambers said the move was due to meetings of euro zone and EU finance ministers taking place in Brussels on October 7th and 8th and the Government having to submit fiscal and budgetary plans to the European Commission by October 15th.
Sinn Féin TD Pearse Doherty described the explanation as a “cock-and-bull story”.
The Central Bank governor said the economy was currently on track to perform “broadly in line with its medium-term potential”. Modified domestic demand – a measure of the economy that largely strips out the activity of multinationals – is forecast to grow by 2.1 per cent this year, 2.5 per cent in 2025 and 2 per cent in 2026.
“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,” Mr Makhlouf said.
“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.”
The Irish Fiscal Advisory Council (Ifac) and the Economic and Social Research Institute (ESRI) have each warned the Government against a giveaway budget ahead of an election as it could contribute to inflation, which has been easing in recent times.
Ifac’s acting chairman Prof Michael McMahon told the Committee on Budgetary Oversight last month that net Government spending was set to increase more than 5 per cent this year and next year. The council estimates that by the end of this year cumulative spending above the rule will amount to €8.5 billion since 2021.
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