Central Bank of Ireland publishes pre-Budget letter
Governor Lane’s letter outlines the Central Bank’s views of the domestic and international macroeconomic environment and the financial system, in order to inform budgetary policy and fiscal strategy.
The letter notes that it is essential to maintain a prudent fiscal strategy and that the establishment of long-term targets to act as an anchor for annual budgetary decisions would be beneficial. It further notes that, while the European fiscal framework prescribes a target ceiling for the stock of public debt, there are compelling reasons to develop a separate national target.
Governor Lane adds that it is important to differentiate between temporary and permanent influences on the trajectories for revenue and expenditure, noting that the recent surge in corporation tax revenue and Central Bank income are temporary features of the economy. On the expenditure side, while the low interest rate environment may currently limit debt servicing costs, interest rates will eventually normalize.
At a macroeconomic level, he states that the credit cycle remains subdued, which is reflected in the current zero value for the counter-cyclical capital buffer, a tool that can be used by the Central Bank to dampen excess credit growth. However, the results of the recent bank stress tests confirm that the financial system remains vulnerable in the event of a downturn in the international macrofinancial environment.
At a microeconomic level, Governor Lane says “any fiscal measures in support of the Government’s housing strategy should be sufficiently targeted to avoid material aggravation of current distortions in the residential property sector.”
The Governor of the Central Bank writes to the Minister for Finance in advance of the Budget annually. This is the first time that the submission has been published in advance of the Budget.