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Ireland’s central bank chief has warned the country’s new finance minister against pre-election budget giveaways that could stoke inflation, underlining how member states’ fiscal policy is increasingly a concern for European rate-setters.
Gabriel Makhlouf told the Financial Times that he would send a “pretty clear message” in his annual letter to the finance minister this week that the government risked “making the inflation problem worse by overspending” on measures to tackle the high cost of living.
Ireland has been running big budget surpluses thanks to a vast inflow from corporation tax, the bulk of which is paid by global technology and pharmaceutical companies based there.
The government, which will update its economic outlook next Tuesday, is pencilling in an €8.6bn surplus this year.
Finance minister Jack Chambers, who was appointed late last month after Ireland nominated his predecessor Michael McGrath to be its European commissioner, told a news conference this week that “no decision has been made on any [policy] measure”.
Chambers, 33, told Ireland’s RTÉ radio on Thursday that the budget would be unveiled on October 1. But he insisted the choice of date — a week earlier than expected — was not a prelude to a general election, which must be held by March 2025.
Ireland’s inflation rate fell to a three-year low of 1.5 per cent in June, below the 2.5 per cent Eurozone average. The Irish central bank said last month that the rate had fallen faster than expected as energy prices eased, although it warned inflation in the services sector remained high.
It is now forecasting headline inflation this year of 2 per cent, down from 5.2 per cent last year, with 1.8 per cent next year and 1.4 per cent in 2026.
Monthly consumer price inflation has been falling since mid-2022, when it reached more than 9 per cent — the highest since the 1980s.
But Makhlouf said there was still a risk inflation could accelerate again, especially if the government offered “measures to address the cost of living in an election year, as they have done in the last two budgets”, such as the temporary tax relief on mortgages introduced last year.
Speaking on the sidelines of the European Central Bank’s annual conference in Sintra this week, he added: “Fiscal policy should support monetary policy and not the opposite.”
Tax data released on Wednesday showed Dublin has plenty of financial firepower.
Corporation tax receipts rose 38 per cent in June to €5.9bn compared with a year ago and hit €12.2bn in the first half — 15.4 per cent higher than the same period last year.
But Chambers said they remained volatile and that the government would stick to a “sensible” and prudent policy.
He has played down suggestions that the large-scale cost-of-living help in previous budgets would be repeated.
The comments by Ireland’s central bank governor, who is a member of the ECB’s rate-setting governing council, underline how policymakers are increasingly concerned about signs of “fiscal slippage” by several Eurozone governments, including France and Italy, that is keeping their deficits and debt levels high.
Makhlouf said Ireland should use its budget surplus to “keep thinking about the big transitions we are facing: demographics, climate change and digitisation”.
Ireland is setting up two sovereign wealth funds to save what it terms “windfall” corporation tax receipts — exceptional rises that may not be repeated — to tackle pension, infrastructure and climate challenges.
The largest of those, the Future Ireland Fund, aims to amass €100bn by 2035 and will be available from 2041 to support pensions and health spending for an ageing population, plus decarbonisation and digitisation projects — a decision Makhlouf has welcomed.
Ireland’s government recently warned that as a share of national income, the increase in age-related expenditure in Ireland between now and the mid-century “is set to be larger than in any other EU member state”.
Ireland has a rapidly ageing population and by 2050 expects to have two working age people for every person over 65, compared with four now.
