The Irish Central Bank head advised the government on Friday to target more ambitious fiscal surpluses for the next three years to ensure the rapidly growing economy does not tip into an "unsustainable overheating phase". Ireland is on the verge of balancing its books for the first time in over a decade after its budget deficit as a percentage of economic growth hit double figures during the financial crisis but it will still run a small deficit this year and next.
The government argues that it needs to maintain the deficit to catch up on investment that nearly ground to a halt during the downturn but central bank governor Philip Lane said it should be running a surplus now given current booming growth.
"While the central bank is intent on building the resilience of the financial system to cyclical reversals, it is clear that fiscal policy must take the lead role in ensuring that the current strong growth performance does not tip over into an unsustainable overheating phase," Lane said in a speech. "In particular, more ambitious fiscal surplus targets for 2019-2021 may be advisable in containing cyclical risks."
Ireland's finance department is targeting a budget deficit of 0.2 percent of gross domestic product this year and 0.1 percent next year before moving to a surplus of 0.3 percent in 2020 and 0.4 percent in 2021. Lane said that in the finance department's own plans setting out those forecasts, it referred to other open European economies with similar unemployment rates to Ireland's 5.1 percent that were already comfortably running fiscal surpluses. He warned that if fiscal buffers are not built up in good times, there is a risk of "repeating the costly experience of past episodes by which economic downturns were amplified by pro-cyclical fiscal austerity." The sharp fall in unemployment in recent months, while very welcome, also showed that the economy may be more cyclically advanced than assumed, Lane added, saying some capacity constraints were emerging in the labour market.
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