By David Barwick – FRANKFURT (Econostream) – The Central Bank of Ireland warned that Irish fiscal policy should avoid unnecessarily stimulating demand, with the economy operating at capacity and externally driven inflation pressures already rising.

Ireland’s economy had grown rapidly since 2021 and was facing capacity constraints, while government fiscal policy had been procyclical in recent years, with net expenditure growing at an average annual rate of 9%, the central bank said in a signed article released Thursday.

That was almost twice the estimated nominal growth potential of the domestic economy, it said. On a real per-capita basis, spending was estimated to have risen by 15% between 2019 and 2025, compared with 11% for the Eurozone.

The central bank cited its latest Quarterly Bulletin, also released Thursday, which revised up inflation forecasts in recent months largely because of higher global commodity prices since the start of the US-Iran war.

In the central scenario, Irish inflation was expected to average 3.5% in 2026, though it could be higher if Middle East tensions persisted, it said.

“With the economy operating at capacity, budgetary policy should not add further demand to the economy at this time”, the central bank said.

The headline and underlying general government balances, excluding windfall corporation tax receipts, were forecast to deteriorate through 2030, it said.

Government projections pointed to continued strong spending growth, averaging 6.4% per year in general government terms through 2030, above projected revenue growth of 5.4%, the central bank said.

The share of windfall corporation tax revenue being saved was expected to fall sharply, largely reflecting additional current expenditure, it said. From 2028, government borrowing would be needed to finance transfers to the state’s two savings funds, it said.

In the absence of an effective fiscal anchor, expenditure overruns relative to initial budget allocations had become established, the central bank said.

Government spending outturns exceeded initial budget allocations by an average of €5.4 billion, or 6%, per year between 2021 and 2025, it said.

Spending had already been revised up for 2026, largely reflecting energy-related supports, with overall net primary spending expected to rise by 7.4% this year, it said.

Any further support measures for vulnerable households or firms should be “targeted, tailored and temporary” and funded within existing budgetary allocations, the central bank said.

Lower net spending growth than currently projected would produce larger headline surpluses and save a greater share of corporation tax revenue, it said.

Maintaining existing levels of public services through 2030 and increasing public investment as envisaged under the revised National Development Plan would require average general government expenditure growth of around 5% per year, the central bank estimated.

Keeping spending growth at that lower rate would be consistent with saving one-third of estimated windfall corporation tax between 2028 and 2030, compared with just 20% in government projections, it said.

A continuation of recent spending overruns would significantly weaken the public finances, broadly eliminating the headline budget surplus by 2030 and increasing the underlying deficit to 6% of GNI*, or €25.7 billion, it said.

Such an outcome would deplete fiscal buffers and limit the government’s ability to respond to future shocks, while higher short-term spending growth would also risk adding to inflation pressures, the central bank said.

The tax base had become more dependent on uncertain corporation tax revenue, which accounted for almost 40% of all revenue growth since 2019 and 23% of total revenue last year, up from 12% in 2019, it said.

The central bank said the government should broaden the tax base and raise revenue as a share of national income to meet known spending pressures and reduce risks from a possible loss of corporation tax.