Central Bank chief Gabriel Makhlouf has warned the Government now is not the time for "giveaway budgets."
The Government is tempted to hand out a feast of budget goodies this October in advance of an expected budget in 2024. And there's been a series of budget kites already flown, four months out, including a €1,000 tax reduction for middle earners and a €25 pensions and welfare rates hike.
But the cautious banker said that it is time to be more prudent as he advised the Cabinet to be "very careful" with the upcoming budget not to risk heightening inflation again. Mr Makhlouf said: "With the economy being at full employment and at risk of overheating, now is not the time for the overall stance of fiscal policy to further stimulate demand.
"Choices should be made to protect against overheating dynamics and ensure excessively high inflation does not become embedded, to the detriment of households and businesses." The Central Bank Governor gave his advice in a letter to Government that will feed into their budgetary considerations.
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He added: "With monetary policy taking the necessary action to restore price stability in the euro area, it would be counter-productive for domestic fiscal policy to stimulate demand. If overheating pressures become pronounced, this could result in a period of higher and more prolonged inflation in Ireland than currently expected, ultimately damaging the competitiveness of the Irish economy and potentially undermining its ability to deliver sustainable growth in living standards.
"If the risks of overheating become more pronounced this year and next, it may be appropriate to adopt a tighter fiscal stance by the middle of the decade. Choices on specific priorities for tax rates and base, reliefs, and all current and capital spending should be considered within this overall bound."
The next major step in the budgetary process is the publication of the Summer Economic Statement next month. This will lay out how much we have to spend this year with record taxes still flowing in.
It was also announced yesterday that special legislation to allow the Government cream windfall taxes of energy company profits was passed by the Cabinet. It is expected that these taxes will add between €280million and €600million to the State coffers when collected later this year.
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