The latest review of financial and economic stability by the Central Bank highlights the significant risks and uncertainties to the outlook. Many of these continue to centre around the policies of US president, Donald Trump; despite the trade deal with the EU, tensions continue between the two sides, with a row brewing in particular about the pace at which Europe is implementing the concessions to US imports which it promised.
In this context, the Central Bank’s latest financial stability review is correct to focus on the various channels through which trade disruption could affect the economy and the Irish financial system. The bank also points to other risks, notably the elevated level of global equity markets, based in large part on confidence about the future of a small number of big companies investing in AI. The increasing role of non-bank lenders in the financial system, not regulated in the same way as banks, is also seen as a potential concern.
Irish banks, businesses and households are judged to be in a relatively resilient position to face any shock. There would still be potentially significant costs to the economy, but there is some leeway to absorb this without – as after 2008 – a complete financial collapse.
The indebtedness of households now averages 93 per cent of their income, compared to 225 per cent in 2009. There are still low income households which, with relatively high borrowings and few spare financial resources, are more exposed. And there are many households reliant on the fortunes of the big exporting companies most exposed to Trump’s decisions. But the overall borrowing level of households has fallen sharply.
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Looking at the exchequer finances, the over-reliance on corporation tax remains “ a key vulnerability.” The story here is familiar, with around half of all corporate tax receipts due to tax planning, rather than activity actually undertaken in Ireland. The bank warns that “there are material downside risks to continued revenue growth from this historically volatile source.”
This Government – and its predecessor – have taken steps to put some of the surplus funds from corporate tax aside. But the bank warns that more needs to be done. And it points in particular to the need for better control of Government spending. If the Coalition is going to invest significantly in new infrastructure and meet other costs coming down the line, then the growth rate of day-to-day spending needs to fall sharply.
Budget ministers Paschal Donohoe and Jack Chambers are working on a medium-term plan to address this. Whether this will lead to new controls being enforced – in an area where previous rules were ignored – remains to be seen. This is politically awkward territory. But the time has come to look seriously at the outlook for the public finances and the choices this creates.
