The latest Central Bank quarterly report is painting a revised and rosy view of the Irish economy for this year and next, but warns the government ahead of Budget 2016 to temper the temptation to devise long-lasting spending commitments.

The Central Bank’s Q4 quarterly bulletin notes that the recovery has become more widespread and has matured beyond the initial net export-driven rebound in activity.

“Faster growth in consumption and employment confirm that the domestic economy is now expanding strongly and growth has become much more broadly based,” the report explains.

As a result of the robust growth recorded in the first half of 2015, the Central Bank also significantly raised its projected growth rate of overall economic activity for this year compared with forecasts in its previous bulletin. “GDP growth of 5.8% is now forecast for 2015, an upward revision of 1.7% relative to the previous bulletin projection,” according to the report.

The Central Bank also revised upwards its 2016 growth projections. GDP is now forecast to grow by 4.7%, up 0.5% on the Central Bank’s previous projections.

In Association with

In terms of domestic demand, the Central Bank bulletin says that, while the rebound on the domestic side was initially driven by a recovery in investment spending, consumer spending has revived and is now playing a more prominent role.

“Consumption has benefitted from rising employment, particularly full-time employment. Since mid-2013, the economy has generated an additional 90,000 jobs, almost all of which are full-time, with the pace of employment creation increasing over the past year.” The pace of consumption growth is expected to be 2.5% in 2016.

The bulletin also notes the strong growth in exports and imports in the first half of 2015. “There has also been a rise in the exports of indigenous sectors, such as agri-food and tourism, which are being supported both by favourable demand conditions in their main markets and exchange rate developments.”

Taxation

On the taxation side, the Central Bank says that there has been a strong recovery in income tax, which now represents around 40% of tax revenue, up from just 26% in 2007.

The report adds: “Reflecting the stronger economic performance, tax revenues have continued to grow ahead of target and overall expenditure has remained lower than profile in the year to date.

At the aggregate level, the very strong rise in the nominal, or money value, of GDP, which will grow at close to double-digit pace this year and remain high next year, implies that the ratios of government borrowing and debt as a share of GDP should fall more sharply than previously expected in 2015 and 2016.”

Prudence

The Central Bank’s advice to the government in the Q4 bulletin is to use the strong growth outlook to help “resolve the legacies stemming from still-high levels of public and private sector indebtedness”.

It continues: “It is imperative, from the point of view of stabilisation policy, to avoid a return to the type of pro-cyclical fiscal policies observed in the past.

“Past experience also highlights the danger of using windfall fiscal gains to finance long-lasting spending commitments. Reaping the benefit of strong growth to reduce debt to lower and safer levels would also solidify Ireland’s reputation for creditworthiness, help to maintain current favourable financing conditions and underpin a lasting recovery.”