Professor John McHale:

The Deputy makes a very good point on stimulus. On the economy growing above a sustainable rate, the Deputy makes a very important point that one should not just consider growth rates, but also levels and whether the economy is still operating below capacity. To the extent that it is, that is an argument for a less-contractionary or more expansionary policy, depending on how one looks at it.

Based on official measures of what is called the output gap, or the gap between the current output of the economy and the estimate of its potential, there is currently no negative output gap. It is not considered to be below potential based on the official measures, which largely come from a methodology that has been agreed by the EU member states and the European Commission. We have big doubts about that methodology. We tend to agree with the Deputy that there is still slack in the economy. If we were not constrained by other factors, we would be supporting a more expansionary policy. The problem is that this is just one factor feeding into the analysis of what is the appropriate policy. One of the factors is underlying spending pressures, which need to be prepared for with the ageing population. There is a very high level of debt, which leaves us in a vulnerable position. However, we take the Deputy's point. That, in itself, is an argument for not pursuing a more contractionary policy, but we have to weigh it against these other factors.

We need better measures of the true amount of slack in the economy. The official agreed methodology has some serious flaws. Addressing that is actually part of our work project for next year. We have been urging the Department of Finance to come up with better measures of the output gap.

The Deputy mentioned the bank issue.