Irish central bank warns against post-election spending splurge

Ireland’s central bank advised the next government not to add to demand in the fast growing economy, a warning against the kind of spending plans analysts say are likely to emerge following last Saturday’s national election.

The left-wing Sinn Fein Irish nationalist party surprisingly secured the most votes, marginally ahead of the centre-right Fine Gael and Fianna Fail, with weeks of negotiations likely needed to cobble together a majority in a fractured parliament.

With Sinn Fein pledging to commit more to both current and capital spending than Fine Gael and Fianna Fail, the likelihood of a greater than expected rise in spending prompted the Fitch and S&P Global rating agencies to flag a possible shift in policy to investors on Tuesday.

Asked about the potential emergence of a high-spending regime, Irish Central Bank Director of Economics Mark Cassidy said the bank continued to press the need for a prudent overall fiscal stance in the coming years.

“At a time when the economy is growing strongly, and we are close to full capacity, then we think a stable policy that does not add to demand in the economy and overheating pressures should be maintained,” Cassidy told a news conference.

“We also advise the prudence of reducing the public debt in the coming years because it is already too high. But do not offer any recommendation as to how that should be achieved, that is entirely a matter for government.”

While Ireland’s economy has grown faster than any other in the European Union for six straight years, the election campaign highlighted deep frustration over deficiencies in healthcare and the high cost and low availability of housing.

The central bank revised up its forecast for gross domestic product (GDP) growth for 2019 on Wednesday, expecting data to confirm that the economy grew by 6.1% last year, above the 5% it had forecast in October.

Expectations for GDP growth in 2020 and 2021 were also revised upwards to 4.8% and 4.2% versus forecasts of 4.3% for 2020 and 3.9% for 2021 three months ago.

It said last year’s expansion was driven by exceptionally strong growth in the exports of pharmaceuticals and chemicals, which the bank expects to continue, masking slower growth in other export sectors experiencing relatively weak demand.

The forecasts are based on an assumption that a new post-Brexit EU-UK trade agreement is in place from January 2021.