Is our fiscal watchdog’s overheating warning overbaked?

Anytime the Irish economy gets a bit of clear blue water ahead of it, it has tended to grow strongly. In and around a sequence of big global crises over the last decade — Brexit, Covid, war, inflation — we’ve experienced strong growth and not the cosmetic gross domestic product kind, but a jobs-rich growth that has delivered record employment.
With these growth spurts come warnings, namely that the Irish economy is dangerously close to overheating and that the Government needs to rein it in fiscally. In loose terms, overheating occurs when an economy is running close to capacity (capacity in the Republic’s case means full employment).
Adding to demand in these circumstances by increasing public spending or cutting taxes will, in theory, backfire by causing prices to increase and competitiveness to erode.
We did this famously in the build-up to the 2008 financial crash when successive budget spending sprees, tax breaks and a generous SSIA savings scheme blew the doors off the Irish economic car.
We’re seemingly at another overheating juncture with the Government planning a generous voter-friendly budget amid warnings from the Irish Fiscal Advisory Council (Ifac) and others that an expansive fiscal stance will add to pricing pressures in an already overpriced economy.
In its pre-budget submission, Ifac claimed the Coalition was pursuing an “everything now” approach to the budget which will add “unnecessary fuel” to the price fire. It noted that while energy prices were falling, domestic prices — in terms of rents, food services and medical costs — were accelerating.
Some in Government circles, however, think these overheating warnings are, excuse the pun, overbaked. They note that we had the same warnings in 2018-2019 from the same agencies and since then the economy has grown strongly, adding approximately 400,000 new jobs in the process. Employment is at an all-time high of 2.7 million. Much of the additional labour capacity has come from migrant workers and increased participation in the workforce by women.
These overheating sceptics also point out that headline inflation in the economy at 2.2 per cent is lower than the euro area average.
Nonetheless, Ifac believes the Government is pushing the boat out too far by simultaneously promising tax cuts, higher day-to-day spending and a continued ramp-up in capital investment and that it needs to prioritise.
It didn’t say the Coalition was politicising the budget ahead of a general election but that was essentially implicit in the critique. Ifac also claimed that repeated breaches of the Government’s 5 per cent spending rule have added €1,000 to yearly household expenses while warning that the Government’s lax approach was being facilitated by windfall taxes from the corporate sector that could disappear as quickly as they appeared.