DUBLIN (Reuters) - Irish central bank governor Philip Lane urged the government on Friday to consider running a substantial fiscal surplus in the coming years, putting money aside and paying down debt to guard against the economy overheating.
Ireland's economy has grown faster than any other in the European Union for the last three years and is showing few signs of slowing down, prompting policymakers to warn that it could overheat in the coming years if falling unemployment leads to excessive price and wage pressures.
The government, central bank and independent fiscal watchdog all agree that, although the jobless rate has fallen sharply to 6.3 percent, the economy is not overheating at present, with overall inflation flat for over three years.
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"Although this may not be an immediate issue in relation to budget 2018, determining the counter-cyclical fiscal stance may be quite relevant for subsequent budgets if the economy hits full employment," Lane said in his annual pre-budget letter to Finance Minister Paschal Donohoe, published on Friday.
"The development of a counter-cyclical fiscal strategy should also strike the balance in the allocation of surplus revenues between the proposed rainy day fund and reducing the gross stock of public debt."
Lane added that, while the near and medium-term projections for the Irish economy are for significant expansion, risks to growth remain clearly tilted to the downside at both European and domestic levels.
High levels of public and private debt also make the Irish economy vulnerable to future interest rate rises and upside shocks from overheating risks, he said.
Ireland's public debt stood at 75.4 percent of GDP at the end of 2016. The government forecasts it will fall to 62.6 percent by 2021.
(Reporting by Padraic Halpin; Editing by Kevin Liffey)