Central Bank in warning on €1k. FG tax proposal

e Government has been warned by the Central Bank not to throw cash at the allegedly “squeezed middle income” people in the next Budget, arguing it could keep in ation high.

Governor Gabriel Makhlouf criticised Taoiseach Leo Varadkar’s proposed €1,000 tax cut for middle income earners, unless it was balanced by tax hikes or spending cuts in other areas.

Mr Makhlouf said the plan would be in opposition to Central Bank advice unless it was balanced by tax hikes or spending cuts in other areas. Addressing the Coalition, he said: “If you do nothing but give middle earners €1,000, then you’re almost certainly going to add to aggregate demand. But, of course, you could do other things that counterbalance that. So it would depend, in the end, what you did.”

It was one of a series of alarms sounded by Mr Makhlouf three months before the Budget, as he and his European Central Bank (ECB) colleagues battle to tame prices, asking governments not to add to demand as they try to dampen it.

Spending should not increase beyond the Government’s 5% limit next year, Mr Makhlouf said, though some measures were “more in ationary” than others.

State-backed building projects could push prices higher in the sector, he said, while “supply-side measures” such as planning reforms, are preferable.

“If you’re going to suddenly fuel some particular type of e BIS also warned that while the world economy seems to have shrugged o a threatened energy crisis last year, the banking system may be especially vulnerable, noting that in the past periods of high in ation have been followed by a banking crisis within three years. e early part of 2023 has already seen a number of signi cant banks thrown into crisis, in part as a result of the more volatile interest rate environment, including Silicon Valley Bank in the US and Credit Suisse in Europe, both ultimately folded into rivals through taxpayer supported rescues. e longer the period of high in ation persists, the bigger and more sustained interest rate rises will be and that means bigger nancial stability risks, the statement said.

While in ation has fallen from its peak that has been largely due to the unblocking of global supply chains snarled up since Covid, the BIS report said reducing the pace further is likely to be harder, indicating a sustained period of high borrowing costs is on the way.

While interest rates have been hiked aggressively by the European Central Bank and its major peers, the impact on in ation has been limited to date. expenditure, which you may call capital – some construction project – and you’re going to throw loads of money at it, that’s likely to have an in ationary impact,” he said. “It’s pretty challenging. We need to create capacity to build more houses, as opposed to adding fuel to the little capacity that we’ve currently got.”

In its analysis, the BIS called on governments to weigh into the e ort to cool economies by hiking taxes and cutting spending. “(Budgetary) consolidation would provide critical support in the in ation ght,” it said.

He said it was “inevitable” that the pension age would have to rise in future as people live longer and costs increase.

“Personally, I think the pension age is an inevitable thing, and it’s really a question of when we do it.” e Budget will come around the time that ECB leaders gather for their rst post-summer rate-setting meeting, with some angling for more hikes. A quarter-point hike is likely in July, he said, but he wanted to see where in ation and bank lending evolve after that.

“On the evidence that we have at the moment, it does look like, in July, there will be another 25 basis point increase.

“Some colleagues do feel that we’re likely to need further rises in the autumn. I’m just prepared to look at the evidence. I do feel that we’re near the top of the ladder. Some others may feel we’re further down, but we’ll see.”

Mr Makhlouf said governments had a bigger role to play in a high interest rate environment, and warned the Irish Government not to overheat the economy by pumping in more money.

“You’ve got all the dynamics of overheating around,” he said.