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Irish central bank governor warns government over growth, spending
October 31, 2015 / 10:47 AM / 2 years ago

Irish central bank governor warns government over growth, spending

Central Bank of Ireland Governor Patrick Honohan is seen during the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming, August 29, 2015. REUTERS/Jonathan Crosby

DUBLIN (Reuters) - A significant part of Ireland’s recently economic growth can be attributed to “distorting features” in the way the activities of multinationals were measured, Irish Central Bank governor Patrick Honohan was quoted as saying on Saturday.

After growing by 5.2 percent last year, Ireland’s economy is forecast to be the best performing in Europe again this year with growth of over 6 percent, dramatically improving debt and deficit ratios after a financial crisis and bailout.

In a letter to Finance Minister Michael Noonan, Honohan said that the growth numbers were “seriously complicated” by the concentration of large multinational firms in Ireland, creating risks on the basis policy is framed.

“Neglecting these measurement issues has led some commentators to think that the economy is back to pre-crisis performance,” Honohan wrote in a letter the Irish Times said was dated Aug 16 and released to it under freedom of information.

Multinationals have a disproportionate impact on gross domestic product (GDP) in Ireland - depressing growth in 2012 when a number of major drugs went off patent in quick succession - and accelerating in 2014 and 2015 when exports grew and are expected to grow by 12.1 and 11.9 percent.

Noonan’s department said earlier this month that domestic demand would be the primary driver of forecast GDP growth of 4.2 percent next year with exports expected to return to more normal levels in line with trading partner demand.

Average growth of around 3.25 percent is forecast for the following five years.

With multinational activity also boosting corporation tax receipts this year and driving a nearly 6 percent overshoot in overall tax collected, Honohan warned against basing spending commitments on tax gains that could quickly disappear.

The government appeared not to heed the advice when it unexpectedly announced earlier this month that it would spend two-thirds of an estimated 2.3 billion euro tax windfall for 2015 by the end of this year.

“Distinguishing between revenue sources that can be considered as stable – such as taxes on personal income – and those which have a one-off or transitory characteristic is a challenge of which I am sure that your department is cognizant,” Honohan said.

Reporting by Padraic Halpin; Editing by Toby Chopra

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