‘A well-functioning financial system is necessary to meet long-term challenges including raising living standards’ – Governor Philip R. Lane

• Economy approaching capacity limits: running fiscal surpluses during upswing will enable counter-cyclical fiscal easing during next downturn.
• A well-functioning financial system is necessary to meet long-term challenges including raising living standards, managing the financial implications of an ageing population and the transition to a low-carbon economy.
• Public investment plays a vital role in long-term development, but its short-term impact on aggregate demand requires counterbalancing fiscal measures to avoid overheating.

Addressing the MacGill Summer School in Glenties, Governor Philip R. Lane discussed the macro-financial policies required to ensure resilience against short-term shocks and support long-term economic and social development.

He said, ‘From a policy perspective, it is clearly important to reduce vulnerability to crises by refraining from adverse macro-financial patterns such as persistently-excessive credit growth or unsustainable fiscal imbalances.  In addition, especially since crises can arise even if domestic credit and fiscal conditions are in reasonable shape, it is also important to ensure the macro-financial system is resilient even in the event of severe external shocks.’

Governor Lane highlighted the role of the Central Bank in implementing macro-prudential policies. These include the mortgage measures and Counter-Cyclical Capital Buffer, which build resilience in the financial system and ensure it is better equipped to handle shocks. From a fiscal perspective he said, ‘the running of budget surpluses that fund some combination of reducing the stock of public debt and building up a rainy day fund of liquid assets would allow the government to implement a stabilising, counter-cyclical fiscal expansion in the event of a future downturn. If fiscal buffers are not built up in good times, there is a risk of repeating the costly experience of past episodes by which economic downturns were amplified by pro-cyclical fiscal austerity.

He said, ‘with the prospect of further economic expansion during 2019-2021, a revision in the budget balance targets for 2019-2021 may be in order if a cyclically-appropriate policy stance is to be attained.  In particular, the projection of a general government deficit of €350m in 2019 is not sufficiently ambitious, given the cyclical conditions.

Discussing the longer-term economic challenges, Governor Lane said the debate about long-term priorities should focus on achieving the optimal mix of developmental policies. These policies must deliver sustainable growth, while recognising the financial constraints imposed by the legacy of high debt levels. The policies must factor in the implications of an ageing population and a successful transition to a low-carbon global economy. 

He added, ‘there is increasing recognition that high-quality management in both the private and public sectors is an important determinant of long-term prosperity.  In the financial system, we play close attention to the quality of management practices in our regulated firms in relation to governance systems, operational and IT risks and the embedding of organisational cultures that meet our requirements in relation to serving the needs of the consumers of financial services. For the public sector, recent international reports have identified scope for improvement in the management of public services and public investment projects.’

He also discussed the importance of ensuring a long-term perspective is taken in designing public investment programmes to contain overheating pressures. He said, ‘the significant social return that may be expected on high-quality public investment pays off over many decades. A fiscally-neutral increase in public investment would deliver the long-term gains without inducing short-term overheating.’

Notes

• Also published today is a signed article from the third Quarterly Bulletin of 2018 titled ‘Irish Government Investment, Financing and the Public Capital Stock’.
• The article considers two aspects of plans for higher investment spending by the Irish government; the potential impact on the public capital stock (government owned assets such as infrastructure) and the macroeconomic consequences of how investment is financed, given that a range of indicators suggest that the economy is close to capacity.