Dr. Thomas Conefrey:

On the point in relation to overheating of the economy, the notion that the economy could be overheating now, when unemployment remains close to 12% and domestic demand is barely recovering from its trough during the crisis, is, in a sense, surprising. At the same time, as pointed out by Professor McHale, the level of slack in the economy relative to what it can potentially produce if all resources are utilised is probably relatively small. Also, the growth rates projected for last year, this year and the coming years predict a rapid growth in the Irish economy, so the situation could change quite rapidly. Fiscal policy needs to be cognisant of that and ensure that it is appropriate given the cyclical position of the economy, which has not always been the case in the past.

With regard to debt reduction, the point made in the report, which, perhaps is not sufficiently clear, is not that households should not continue to reduce debt levels. The household-debt-to-GDP ratio in Ireland is among the highest in Europe. The deleveraging process is necessary so that repair of balance sheets can continue. It is true that if households are going through the process of gradually reducing their financial debts, this could dampen consumption for a number of years. Currently, the savings rate is high but it is projected to fall gradually. It is undoubtedly true that as households gradually pay down high levels of debt, this will negatively affect consumption.