Ireland Warned Not to Overheat Economy

The governor of the central bank has warned the government that too rapid an expansion of house-building could destabilize the economy.

In a pre-budget letter, Philip Lane said the government should be prepared to raise taxes to prevent the economy overheating, RTE reported.

After years of hard slog the public finances and wider economy are stable, but the trick now is to keep them that way, according to the central bank.

Lane said he is worried that too rapid an expansion of spending—particularly in house-building—could create the same sort of instability that caused the economic crisis eight years ago.  

Building more houses will increase economic growth—already among the highest in the western world—and which could risk overheating the economy. He said the government may need to increase taxes during a period of high growth, running a large budget surplus, which can then be spent during a downturn.  

Alternatively, slowing down the rate of investment and spreading it over a longer timeframe could achieve similar results, he added.

The governor also urged caution at using tax breaks to stimulate some sectors of the economy, regardless of their implications for the rest of society.

Speaking on RTE News at One, Lane said a balanced budget is reasonable for 2018 but as the budget is now a multi-year process, the government needs to make choices if the economy keeps growing. He said that if the government does not match spending increases with revenue increases that may contribute to overheating pressures in the economy.

He said if the government wants the construction sector to expand in order to build public infrastructure and more houses, some other part of the economy may need to slow.