Mr. Seamus Coffey:

The first three of these questions are clearly within our mandate. I am not sure about the final one regarding whether a speculative property bubble is on the horizon. In the context of where we are in the economic cycle, most indications point to the economy being close to its potential. The unemployment rate is falling towards 6% and is set to fall just below it and the recovery we have seen in recent years is something that happened back in the early 2000s. People who look at the Irish economy, which had grown strongly in the 1990s when the unemployment rate had fallen, asked what was in store for the Celtic tiger in 2001 and 2002. The suggestion at the time was that we would return to our long-run potential growth rate of 3% or 3.5%, that we would not see an imbalance one way or the other, and that it was something the economy could maintain as the population grew, as we had moderate inward investment and as credit expanded at a moderate pace.

Of course, what we know is that the economy did not return to growth rates of 3% to 3.5%. It stayed at 6% to 7% to 8% right through to the end of 2007. That was achieved by two means - first, by large inward migration that facilitated that increase in output and, second, much of that increase was funded by credit expansion. While the forecasts seemed reasonable at the time, what could not have been, and was not, foreseen was the huge increase in credit and the huge inward migration which allowed the economy to grow above its potential for a period of time. It could not go on forever. If something cannot go on forever it will stop, and it stopped in 2008. We are in a somewhat similar position now. The economy has grown strongly for a number of years, the unemployment rate has fallen and most forecasts are that the economy will grow between 3% to 3.5% over the medium term. That is what the Department of Finance is forecasting, and that is what we have endorsed. Overheating is a potential risk but it may not happen. If the growth rates stay at 3% to 3.5%, the economy can sustainably do that for period of time. The thing is the Irish economy does not do moderation. We have looked at it over a 60 year period. If one takes that 3% to 3.5% as one's middle point and if one reduces it down to 2% and increases it to 5%, and says that that is within the ballpark, over a 60 year period, the Irish economy is within that range of 2% to 5% less than a third of the time. It has either been growing much more quickly than 5% or lower than 2%. While the central forecast is for nice moderate growth of 3.5% and for an economy that is in a stable position, that is not something that tends to happen very regularly in the Irish economy.

The issue is about the direction in which it will go. In the near term, we see some potential upside risk, as has been stated with housing. As one moves out into the medium term, there are more negative risks that could lead to a downturn. How much of a buffer would one need to deal with some of those? The buffer does not need to be huge. The impact of the previous crisis was quite large. One simply wants to avoid getting into a position where one has to have forced austerity at a time when one's economy needs to be stimulated. The average increase in budget deficits around the euro area in 2008 was six percentage points of GDP. The issue was that overall budget deficits across the euro area were either in a small deficit or close to balance. One went from being in a balanced position all the way down to an annual deficit of minus 6% of GDP. One simply cannot keep borrowing 6% of GDP, particularly when growth is anaemic, which in a sense led to the debt crisis, as debts ballooned.

The buffer itself does not have to be very large. If one had a one or two percentage points of a GDP surplus in the other direction, then one is only dropping, when the crisis comes, to 3% or 4%. We know that the EU rules have what might be considered an arbitrary point of three percentage points of GDP for the annual deficit limit. However, if one is just one or two percentage points in terms of running a surplus, one has sufficient space to deal with a reasonably-sized downturn. With a downturn like we had in 2008, it is hard to know what buffer would have been appropriate to deal with that. It does not have to be very large. What one is doing is giving oneself the capacity to absorb whatever downturn is coming, in that one is not adding to the problems by having to cut back spending. Just even cutting back spending growth can lead to problems.

If we believe the economy is growing at 5% or 6% and we are growing spending at 3.5%, that in itself is countercyclical. Where the economy is growing faster, government spending in real terms is growing at a lower rate. If we hit a downturn, and the economy slows to 1% or 2%, and if we keep spending growing at 3.5%, that is an injection. That again is countercyclical. The economy has slowed down but spending is now above it. If we have this stable and steady increase in spending, to which Mr. Tutty referred, that can offer that countercyclical buffer that we are looking for.

Where will the downturn come from? It does not matter where it comes from. By and large, the impact of many of the risks we have identified will be the same. This will be a reduction in economic activity, whether it is as a result of Brexit, trade with our nearest neighbour, US trade policy, trade with one of our largest trading partners or the international tax environment and our key policy plank of attracting foreign direct investment. If one or all of them hit us, the impact would, by and large, be the same. I do not think it necessarily matters which one affects us, as long as we identify there are potential risks out there. Using the Mr. Donald Rumsfeld quotation, there are things there that we might not be seeing there at all.