Central Bank Governor Gabriel Makhlouf has urged the Minister for Finance to "limit adding to existing excess demand and inflationary pressures" in the upcoming Budget but to support the most vulnerable "through temporary and targeted supports".
The Governor made his comments in a formal letter to the Minister, which forms part of the pre-Budget process.
He also outlines other priorities including reducing reliance on "excess' corporation tax, getting value for money in public investment and ensuring the Government has the resources to respond to future downturns.
The Governor's letter says projections for growth in the domestic economy, while still positive, have been revised downwards because spending by consumers and businesses has been affected by higher inflation and heightened uncertainty.
It says that while the first half of the year was strong for the country’s exporting sector, the outlook for the international economy has deteriorated.
The letter states that energy prices are expected to remain "above pre-pandemic levels" up to 2024 although "more adverse outcomes are possible".
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On interest rates, the letter, which was written in July, refers to the ECB’s half a percentage point increase that month.
It says "we are in a different inflation/interest rate environment than has been the case in the years leading up to the pandemic."
It goes on to say that households, businesses and governments will all see higher borrowing costs "over the coming period".
On corporation tax, the letter says the Central Bank's research suggests that €8 billion of last year's take of just over €15 billion can not be explained by the underlying performance of the economy.
It added that it "could be considered as potentially unsustainable".
It warns about relying on potentially unsustainable tax receipts as permanent and urges the Government to introduce a "clear strategy" to save unexpected levels of corporation tax. It suggests the Rainy Day Fund might be more appropriately considered "a resilience fund".
It also says that reduction of the national debt should remain a priority in the years ahead.
Today's letter also highlights the benefits of addressing climate action and our ageing population sooner. It says previously considered "trade-offs between action now and in the future are not as distinct".
A spokesman for the Minister for Finance Paschal Donohoe said the Minister has received the Governor's letter and that the letter would be considered as part of the preparations for Budget 2023.