It is a fair bet that the Central Bank’s call in its latest quarterly bulletin that economic policy be set to guard against future shocks will not be top of the agenda in government formation negotiations. Tackling the health and housing crises will dominate – and both are vital issues. But so too is ensuring the public finances stay solid and that policy does what it can to underpin sustainable economic growth. This is the balance which the next government, whatever its shape, will have to strive to achieve.
It is welcome that all of the main parties are committed to keeping the budget in surplus. Department of Finance forecasts before the campaign estimated there would be €11 billion in unallocated resources over the term of the next administration, allowing the parties to plan increased spending, while keeping the exchequer finances in the black. The risk is that a hit to growth could quickly throw these forecasts off course.
What takes priority if this happens? Risks from Brexit and international tax reform lie ahead and, as the Central Bank warns, growth may also slow as the economy approaches full capacity.Where will priorities lie if this happens?
All of this calls for caution in framing the next programme for government – and for setting the public finances on a path which leaves room for flexibility and enhances the overall resilience of the economy. If growth continues, there will be resources for significant increases in spending. If there is a shock, the important thing is to have the flexibility to respond without having to slash vital investment or impose big hikes in taxation.
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As the negotiations get under way in earnest, the danger is of too much by way of extra public spending being agreed, of the tax base being narrowed, and of no clarity on what happens in the event of a slowdown. Of course, voters are demanding change and progress in tackling key issues. And so they should. There is huge room for improvement. But, ultimately, they will not thank any government which reverses the progress in the public finances which has been seen since the economic crisis.