Borrowing money for saving funds 'doesn't make sense'

Central Bank Governor Gabriel Makhlouf has said it "doesn't make sense" for the Government to borrow money to put into long term savings funds.

Earlier this week, the Irish Fiscal Advisory Council criticised the Coalition for its plan to increase the national debt by €30 billion by the end of the decade to put money two saving funds.

The funds were set up to hold some of the volatile corporation tax receipts paid by multinationals.

But the Irish Fiscal Advisory Council said the Department of Finance's projections show the State plans to spend €5 out of every €6 which is paid in the tax.

As a result, the Government plans to borrow money to meet its obligations to the two long-term funds.

Speaking on RTÉ's Morning Ireland, Mr Makhlouf said "on the face of it...it doesn't make sense."

Mr Makhlouf also cautioned the Government against the use of universal supports to help with rising energy costs after the European Central Bank increased interest rates from 2% to 2.25% to control inflation.

"I would be unhappy if monetary policy decisions we made were counteracted by Government," he said.

"I'm sceptical of supports that go to the best paid people as well as the poor people," he added.

The Governor also said the Government should be absolutely focused on infrastructure spending to open up the bottlenecks that are appearing in the economy.

He also said that yesterday's interest rate increase by the European Central Bank is a direct effect of the Iran war and the aim of the rate hike is to keep inflation down.

"Inflation hurts everybody. It hurts the most vulnerable. And at the end of February, we were in a position where we were on target to meet to achieve our target of inflation at 2% in the euro area," he said.

"Events have changed and the decision that we made yesterday was based on the fact that inflation is now on the up and if we don't get ahead of it and actually start tackling it, in the end it could run away of itself and actually become a bigger problem than it is right now," he explained.

He said the direct effects of the Iran warn include a supply shock.

"We're seeing them at petrol pumps, but we're now seeing a much more broad based impact - we're seeing indirect effects and quite clearly when your target 2% inflation is above 3% and actually projected to be on average 3% this year, I think it would be a mistake for us to do nothing," he said.

"Certainly all my colleagues agreed that we had to do something because the evidence is not that it's just a simple supply shock that you can look through," he added.

Mr Makhlouf said the ECB waited 15 weeks "and now we feel it's the right thing to do."

In relation to a possible reversal of the interest rate increase if the Iran war ends, Mr Makhlouf said the ECB was not on a predetermined path.

"We look at the evidence, and we'll make a judgement based on that," he stated.

He said that ending the conflict would be welcome for everybody "and certainly for the families affected by the conflict directly who live in that part of the world".

"But I think it's probably a bit early to conclude that an immediate cessation to the conflict will result in an immediate cessation or returning to normal of petrol prices. I'm being a bit more cautious about the likelihood of that," he said.

If there was a cost-of-living package introduced to offset the increase, Mr Makhlouf said "certainly it could negate what we're trying to do, and I would be unhappy if monetary policy decisions that we're making were being sort of counteracted directly by Government fiscal policy".

"It's absolutely right because inflation does affect everybody as I said, it affects the most vulnerable and certainly it's right for the Government to look to target support appropriately," he said.

"But I think targeting, tailoring and time limited supports is what we should be looking for as opposed to countering what we're trying to do at the ECB, which ultimately would hurt everybody," he added.

On the prospect of a universal energy credit being introduced, he said that it depends on the design and on the size.

The Central Bank recently published an analysis that showed the impact of the supports that had been provided during the Covid pandemic.

The Central Bank chief said the research showed the supports had been "very generous".

"But our analysis also showed that a more targeted series of supports would have benefited the worse off much more. So, I'm very sort of sceptical about the value of supports that actually go to the best paid people as well as the poor people," he stated.

"I think it's the vulnerable people that should be targeted. And in the end what we're looking to do is to actually achieve price stability so that the economy continues to work well, everyone has jobs," he said.

"Intervening in price setting creates complications. And although it's absolutely right that the Government looks to support vulnerable people, it should do so with care," he advised.

On comments that he wrote in the Financial Times that Ireland risks overheating the economy and the Government should rein in spending, Mr Makhlouf said he is concerned about the level of spending.

"Over the next week we will be publishing our next set of projections for the Irish economy as well as our analysis of what's happening on spending, and this is partly early work in advance of my annual letter to the Minister in advance of his Budget," he said.

He also said he has seen the analysis that the Irish Fiscal Affairs Council has done, adding that it chimes with what he has said in the past.

"The most important thing that we should be doing in my view is looking to build our resilience and if the evidence of the last 18 months is anything to go by, never mind the last few years, we've been experiencing a series of shocks," he said.

"But we're also in a period of transition, whether it's climate, whether it's demography and we need to be building resilience to those and that actually involves saving money as opposed to spending it quickly," he added.

The Governor said today that he would not challenge Minister Jack Chambers' views on keeping to its spending limit, but added that the country needs discipline in public spending.

"We have experience in the past which we should learn from," he stated.

He said that one of his concerns is that this surplus corporation tax should not be relied on for permanent spending "because it can disappear as quickly as it arrived and that will cause problems for us".

"It is absolutely about choices. Governments certainly can decide what they want to do and where they want to put their investment into, but it is about choices," he said.

"In my view, the Government should be absolutely focused on infrastructure spending to open up the bottlenecks that are appearing in the economy," he said.

"We all know about housing, but it's relevant to the energy grid, it's relevant to transport. These are bottlenecks that are constraining the growth of the economy, and they should be prioritised as opposed to current spending," he concluded.