The Central Bank has warned that a sharp increase in inflation now threatens to undermine the competitiveness of the economy next year.
In its sharpest recent criticism of Government policy, the bank's winter economic bulletin says tax cuts and spending increases in the Budget will provide an unwelcome boost to the economy. This increases the chances that the current record growth could eventually end with a sharp slowdown.
The Government's main task, says the bank, should be to engineer a gradual slowdown. However, the Budget tax cuts will boost economic growth by close to 1 percentage point next year to 7.25 per cent, while inflation will average 3.5 to 4 per cent in 2000, compared to 2.1 per cent now.
The bank's assistant director general, Dr Michael Casey, speaking at a briefing on the report yesterday, said the theory that inflation rates across Europe would converge after monetary union had been proved wrong. Our inflation rate was already twice the European average and five times the German rate.
"If 4 per cent happens, we will be inflating even quicker and will lose competitiveness," he said.
He also pointed out that there was significant additional inflation, which was not being measured. "When you are stuck in a traffic jam or queue in a shop or cannot get through on the phone it is a form of hidden inflation.
The bank was also critical of the expansionary effect of the Budget which will boost economic growth but not labour supply to a significant extent.
Dr Casey said the £1.1 billion tax give-away took the bank a little by surprise.
"We hope that the tax package will be factored into the pay discussion of the social partners. If that does not happen, the whole package will be extremely expansionary," he added.
The bank has pencilled in wage increases of about 6 per cent in 2000 and an increase in consumer spending of 7.5 per cent, up from 5.5 per cent before the Budget.
This level of wage increase can be justified, according to the bank, as Irish productivity is 2.5 per cent to 3 per cent higher than average euro zone productivity. And with wage rises in the rest of EU averaging around 3 per cent, Ireland can have rises of up to 6 per cent without losing competitiveness.
However, it also pointed out that the strongest wage pressures were in health, education and security, which were not subject to market disciplines or international competition.
The bank also questioned whether the Budget would actually significantly boost the supply of labour, which was one of the Minister for Finance's objectives. "It is likely to widen the gap between supply and demand," Dr Casey said. "Expectations could be explosive."
The bank's director of economics, Mr Tom O'Connell, warned that a decline in the US stock market could see investment by multinational companies here falling off. That could lead to an erosion of confidence and even a significant slowdown.
Dr Casey also warned that many firms were benefiting from the strength of sterling, which makes Irish exports to Britain very cheap. When that turned there could be substantial job losses and a lot of companies could find themselves in difficulty.
The Fine Gael leader, Mr John Bruton, called on the Government to start again on the Budget. He said that the declaration by the Central Bank that Budget 2000 was "inappropriate" could not be more serious.