Governor’s pre-budget letter published

• Ireland is particularly exposed to the fallout from changing geoeconomic relationships but the opportunities also exist for domestic policymakers to focus on building long-term resilience in the economy and public finances
• Capital investment to close infrastructure gaps and boost long-run growth should be prioritised over current spending
• A credible fiscal anchor is needed to guard against repeating mistakes of the past and to support rigorous expenditure control and enable longer-term investment
• Reducing the risks to the public finances from an excessively narrow tax base has become more immediate
  

The Central Bank of Ireland has today (30 June) published the annual letter from Governor Gabriel Makhlouf to the Minister for Finance ahead of Budget 2026 (PDF 3.04MB).  The Governor writes to the Minister each year in advance of the Budget in accordance with the Central Bank’s mandate to provide analysis and comment to support national economic policy development.

In his letter the Governor writes that, with the global economic backdrop continuing to shift, there is heightened uncertainty on the outlook for the economy.  But opportunities also exist for domestic policymakers to focus on issues within their control so as to build long-term resilience in the economy and public finances.  In particular, budgetary policy is now in a good position to address three priorities:

• Improving resilience and broadening the tax base given risks to the sustainability of corporation tax;
• Addressing infrastructure gaps in a sustainable manner;
• Planning for the fiscal impact of long-term challenges.

Achieving progress across these three areas will entail trade-offs and require choices and commitments to be made on public expenditure and taxation, along with reforms to improve efficiency in the delivery of public capital expenditure and the crowding-in of private investment. The right choices made in a timely manner can boost long-term potential growth, safeguard the public finances and underpin sustainable growth in living standards for the community as a whole.

In his letter the Governor noted that reforms at EU level and domestically have aimed to address the risks that budgetary policy can be short-term in focus but that they have had limited success.  EU rules, including the most recent reforms, are based on sound principles, including a much greater focus on medium-term budgetary planning – but their application and effectiveness in an Irish context is undermined by their reliance on GDP.   To avoid a repeat of past mistakes and to shift budgetary policy away from an excessive short-term approach, the Government should commit to a credible fiscal anchor for budgetary policy to ensure the overall fiscal stance is suitable, guards against procyclicality and boom-bust dynamics and safeguards long-run fiscal sustainability.  It is important that policy supports rigorous expenditure control – not least of current expenditure – and enables the enforcement of sustainable increases in overall net government expenditure over time.

In his letter, the Governor commented “the medium-term resilience of the public finances points to a need to broaden the tax base to increase government revenue as a share of national income so as to address known emerging funding needs and to mitigate the reliance on CT receipts.  Analysis by Central Bank staff indicates that government expenditure will need to rise by 6½ percentage points of national income (GNI*), or €265bn, between 2025 and 2050 to fund higher age-related spending and the additional public investment required to meet housing and net zero targets.  It is important that transfers to the FIF/ICNF continue as planned but also that the Funds are not seen as a panacea.  For example, the FIF will be insufficient, on its own, to fund the higher level of public expenditure that will be required to meet the needs of an older population and to fund climate and housing investment. Taking prompt and concrete action to broaden the tax base would help to ensure that additional known expenditure needs can be met sustainably even if CT was to decline significantly.”

In the letter the Governor acknowledges that fiscal policy requires carefully balanced calibration “to ensure sufficient economic and fiscal space is available to achieve the necessary (sustainable) rise in public capital expenditure to address infrastructure gaps in housing, water, energy and transport over the near-to-medium term.  At the same time, the need to reduce the risks to the public finances from an excessively narrow tax base has become more immediate, given the reliance on CT receipts from a small number of MNEs, which may be more vulnerable in light of geoeconomic fragmentation. ”

“Public capital investment alone will not be sufficient to address the housing and wider infrastructure gaps that have emerged.  Fiscal and broader public policy should more actively consider reforms to crowd-in private investment and to promote productivity growth.  Domestically, given the necessary large increases in public investment already being undertaken and planned, reforms that reduce delays, and, therefore, the ultimate costs, in the planning and building of infrastructure are needed to help ensure that the benefits of public investment for longer-term growth are fully realised.  Measures to incentivise scale and investment in new machinery, equipment and technologies in the construction sector would enhance productivity growth and enable more sustainable delivery of housing and infrastructure.”

Notes

Read previous pre-budget letters

View signed article "Managing Risks and Building Resilience in the Public Finances"