Finance Minister Paschal Donohoe should hike taxes to help prepare Ireland for the next economic downturn, the Central Bank has warned.

Governor Philip Lane said that failing to balance the books during economic recovery has left Ireland less able to manage during hard times, risking fresh austerity.

Mr Lane specifically identified taxes on spending and investment - such as property taxes and taxes on savings - as a way to cool the economy.

While he backed plans for greater public investment, Mr Lane said tax increases should be used to fund them, and to prevent the economy overheating.

He said financial "buffers" were needed to better cope with recessions and other countries were already building them.

In a speech that will be seen as a shot across the bows of Mr Donohoe ahead of Budget 2019, the Central Bank Governor told the MacGill Summer School: "The Government really should be running a surplus at this point."

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Despite a stronger recovery than most of our European peers, Ireland has done less to future-proof the State finances, he starkly warned.

Higher taxes in some areas would also prevent the economy overheating as investment by the public sector ramps up, added Mr Lane. "Through taxation, if you cool down the level of spending in the economy, you make room in an orderly way."

Policymakers need to plan now to be better placed to manage a downturn when it comes. "The history of Ireland is, in a crisis we come together, debate and find solutions," he said.

But he warned that during the good years there's a lack of risk management - "a lack of preparation for the next downturn".

He questioned the prudence of Mr Donohoe's fiscal policies - which have delayed balancing the budget in recent years, as public spending has increased faster than tax income.

"Right now the fiscal plan is essentially of still having a deficit in 2019, admittedly a relatively small one," said Mr Lane.

"But to be running a deficit under these conditions is probably not in line with best principles of risk management.

"Others (countries) are already running significant fiscal surpluses. We appear to be not making the same fiscal preparations as those others."

This directly contradicts the message from Taoiseach Leo Varadkar in particular, who earlier this month promised tax cuts for middle income households in the October Budget, as well as a greater programme of public investment.

"It's not a choice between public spending and fiscal prudence because there are other levers such as the overall amount of taxes that are raised that can reconcile that balance," Philip Lane said.

However, while more public spending can be appropriate, "you also need to build up some surpluses".

That includes not spending all of the taxes collected in a given year.

"The reason for that is not to suppress any social goals, but to recognise that the only way to avoid having the austerity in the next downturn that we had in the last downturn is to build up the fiscal buffers in the good years."

Around the world it is often those governments with high ambitions for their public sector that typically run surpluses in good years, because they really don't want to impose austerity in downturns, he told the audience. "That's really important to know," he said.

"If the political decision is 'let's have people work on public investment projects', it does mean something else in the economy has to slow down."

He warned that Ireland has benefited from a number of factors in recent years, including low interest rates and recoveries in the global economies.

In terms of long term planning, Dr Lane said that not all booms were followed by a bust, or vice versa.

A number of potential factors - including a hard Brexit, a possible shift towards protectionism in the global economy, or a shift in market sentiment - could all tip the current recovery off course.

Irish Independent