Dublin – Central Bank Governor Gabriel Makhlouf has cautioned that the Government’s decision to raise public spending above 5% over an extended period could exacerbate inflationary pressures and wage hikes. Speaking to the Oireachtas finance committee, Mr. Makhlouf stressed that the current economic conditions, particularly with the economy operating at full employment, make such fiscal measures unnecessary and potentially harmful.
The Governor expressed concerns that the continued expansionary fiscal policies may add undue stimulus to an economy already at capacity, leading to risks that could undermine long-term sustainable growth. “This situation will undermine competitiveness and create risks that could damage sustainable economic growth,” he said in his opening statement.
While acknowledging the need for increased public investment to address housing deficits and tackle long-term climate transition challenges, Mr. Makhlouf emphasized that the Government must manage its fiscal policies carefully to prevent economic overheating. “With the economy already at full employment, there is a risk that increasing public investment on the scale envisaged fuels overheating pressures and results in poor value for money,” he warned.
He added that while public investment increases are essential, they should have been managed within an overall spending cap of 5%, a move that would have required difficult trade-offs in other expenditure areas, including taxation.
Beyond fiscal measures, Mr. Makhlouf highlighted the need for broader policy reforms to ensure that increased government spending delivers real improvements in services and infrastructure. He pointed to delays in the planning system and construction sector bottlenecks as key issues requiring urgent attention. “Progress in these areas would also help to further incentivise and crowd-in private investment,” he stated.
On the broader economic outlook, Mr. Makhlouf noted that while Ireland’s economy continues to grow at a strong pace, challenges such as supply and infrastructure constraints are becoming more apparent. He also pointed out that while globally driven inflation is easing, domestically driven inflation, especially in the services sector, remains elevated at around 4%.
In a separate discussion, Mr. Makhlouf defended the Central Bank’s decision to abolish its standalone consumer protection directorate. He explained that consumer protection remains a priority, but the bank is moving toward an integrated framework to better manage risks in an increasingly complex financial environment.
“The new approach will allow us to do more, not less, to protect consumers,” he assured.