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Central Bank's Philip Lane weighs in on "lepreconomics"

The head of the Central Bank has suggested that alternative methods for measuring the Irish econo...
Newstalk
Newstalk

13.52 5 Sep 2016


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Central Bank's Philip...

Central Bank's Philip Lane weighs in on "lepreconomics"

Newstalk
Newstalk

13.52 5 Sep 2016


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The head of the Central Bank has suggested that alternative methods for measuring the Irish economy need to be found.

Governor Philip Lane's warning comes in a letter to Minister for Finance Michael Noonan in advance of October's Budget – the annual correspondence will now be published every year.

In his "observations on the current macro-financial outlook", Lane refers to the Central Statistics Office's heavily criticised announcement of a 26.3% GDP growth rate for 2015 (described as "leprechaun economics" by Nobel prize-winning economist Paul Krugman) as an example of how following Europe's lead doesn't always provide an accurate picture.

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Lane argues:

"The well-known interpretation issues with measured GDP for Ireland makes it obvious that standard fiscal indicators (expressed as ratios to GDP) need to supplemented with locally-developed targets that are robust to statistical issues."

In the same vein, the Governor suggests a national target for the stock of public debt would be preferable. While the European target ceiling is 60% of GDP, Lane says given our small size and exposure to economic fluctuations, this should be lower for Ireland.

"Prudent fiscal strategy remains essential"

While he expects the economic recovery to proceed at a moderate pace, with growth of 4.9% and 3.6% for the next two years even allowing for the negative impact of Brexit, he does state that the balance of risks is "clearly tilted to the downside" and that the financial system "remains vulnerable".

As such, the letter states that "it is clear that a prudent fiscal strategy remains essential, given the feedback loops between fiscal stability and macroeconomic stability."

More long-term thinking to offset temporary shocks and assuming that some fraction of the recent surge in corporation tax revenues might be "temporary in nature" is also recommended.

 

Concluding, Lane wrote:

"Budgetary decisions should also be embedded in a long-term strategy that recognises the implications of an ageing population for expenditure on pensions and healthcare.

"Finally, at the microeconomic level, 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."


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