The Central Bank has questioned the economic case for an expansionary budget next year, saying there is no need for fiscal policy to support activity.

In a new quarterly forecast with upgraded projections for growth this year and next, the bank warned against using unanticipated tax revenues in the budget and said the money would be better spent paying down the national debt.

The forecast comes as the Government prepares an expansionary package between €1.2 billion and €1.5 billion in the October Budget.

Although bank chief economist Gabriel Fagan told reporters he would not use words such as “imprudent” or “unwise” in relation to the Government’s plan, he said consideration should be given to a faster pace of fiscal consolidation.

‘Progress’

As recovery strengthens, the bank has found little evidence of slack in the economy. “The idea would be to maybe build fiscal space for a time when it might be needed. If we had a situation where there was an adverse shock, fiscal policy can respond. This can be brought about where we have a somewhat more ambitious pace of fiscal consolidation.

“We’ve seen in the past the damage that is done to the economy from pro-cyclical fiscal policy, a policy which is expansionary during good times and contractionary during bad times. We should try to avoid repeating that in the future and that would argue in favour of a cautious approach to fiscal policy over the next few years.”

This stance on the Budget is at odds with the Government, which has argued that tax cuts and spending measures are required to boost growth.

The bank’s third-quarter forecast said GDP would expand by 4.1 per cent this year, 0.3 percentage points higher than its previous forecast. The current Government forecast is for 4 per cent GDP growth. The bank also upgraded its 2016 GDP forecast by 0.5 percentage points to 4.2 per cent.

“While the initial strengthening of activity in 2014 was driven by net export growth, the recovery over the past year has become more balanced, with domestic drivers increasingly playing a more prominent role.”

Absence

“Tax revenues have grown ahead of target and expenditure has been lower than profile . . . The general government deficit is likely to come in below target in 2015 and Ireland is on course to come out of the excessive deficit procedure by the end-year deadline.”

Separately, Mr Fagan said the bank had established a dedicated unit to examine the implications for Ireland of a British withdrawal from the EU. He said the Central Bank was working with other institutions but would not name them. Such work was at an early stage, he said.