September 8, 2017 / 12:30 PM / 10 months ago

Central Bank says Ireland should plan for possible overheating

DUBLIN (Reuters) - Irish Central Bank Governor Philip Lane on Friday urged the government to plan for the possible overheating of the economy by considering future tax increases, putting some surplus revenues aside and paying down more debt.

FILE PHOTO - A painted euro sign is seen on a wall in Dublin city centre October 22, 2014. REUTERS/Cathal McNaughton

Ireland’s economy has grown faster than any other in the European Union for the last three years and is showing few signs of slowing down, prompting policymakers to warn that it could overheat in the coming years if falling unemployment leads to excessive price and wage pressures.

The government, central bank and independent fiscal watchdog all agree that, although the jobless rate has fallen sharply to 6.3 percent, the economy is not overheating at present, with overall inflation flat for over three years.

“Although this may not be an immediate issue in relation to budget 2018, determining the counter-cyclical fiscal stance may be quite relevant for subsequent budgets if the economy hits full employment,” Lane said in his annual pre-budget letter to Finance Minister Paschal Donohoe, published on Friday.

“The development of a counter-cyclical fiscal strategy should also strike the balance in the allocation of surplus revenues between the proposed rainy day fund and reducing the gross stock of public debt.”

Lane told reporters that if signs of overheating do appear, the government should also consider adopting measures that slow consumption and investment growth. He identified property tax as one area that was available for such increases.

Lane has previously said government plans to ramp up public investment held back by years of strained finances may require it to cool other parts of its economy from 2019.

He acknowledged that this was not an easy message for politicians.

However he said the economy was not in a boom phase yet and that the possibility of overheating was still a conditional scenario and could be offset by other factors, such as the disproportionate effect on Ireland from Brexit.

“We may not get there,” he said.

He added that risks to growth remain clearly tilted to the downside at both European and domestic levels.

“For me the issue is let’s not do this [boom and bust] again, let’s try and stabilize the economy,” he said.

“The more stable the economy is... it’s going to be much easier in terms of planning socially vital issues,” Lane said.

Additional reporting by Conor Humphries; Editing by Kevin Liffey

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