Ireland may need to cool economy from 2019, central bank chief warns

By Padraic Halpin

DUBLIN, July 24 (Reuters) - Ireland (Other OTC: IRLD - news) may need to cool parts of its economy in a couple of year, potentially by raising taxes, if ramped up public investment coincides with full employment, its central bank chief was quoted as saying on Monday. The economy has grown faster than any other in Europe for the last three years and employment is showing no sign of slowing down, with a current jobless rate of 6.3 percent down from over 15 percent five years ago.

"We are not overheating now and we may not overheat because of downside risks," Governor Philip Lane told Ireland's edition of The Times newspaper in an interview, a transcript of which was published on the central bank's website.

"The big challenge for the government is that from 2019-2021 in the scenario where we do hit full employment in late 2018 or early 2019... the nature of the economy totally changes and everyone recognises that this has to be handled."

Full employment means that just about everyone who wants a job has one, a situation which leads to workforce shortages and wage inflation.

Dublin also plans to stimulate growth by nearly doubling capital spending over the next five years, tackling bottlenecks built up after investment ground to a near-halt during the financial crisis and which remains among the lowest in the European Union.

Lane said that while there was some slack in the economy with wage growth remaining relatively modest, pay pressure built up quite quickly when Ireland last reached full employment in the late 1990s before the crash of the "Celtic Tiger" economy.

"The process of adding through a surge in public investment, how does that work in full employment? Other parts of the economy may need to cool down and this is where the government's overall fiscal strategy may come into play," Lane said.

"So, raising taxes... Not saying we're going to raise taxes forever. But raising taxes to make room for a surge in public investment or to make room for the fact the economy is operating above potential... For small economies the type of budget surplus needed could be significant."

Ireland's Finance Minister Paschal Donohoe said last week that overheating was a risk that could develop and that the government needed to be ready to act.

Ireland also faces an economic unknown relating to next door Britain's leaving the EU, potentially cutting its land route to mainland Europe for exports and also creating a different trade relationship with its main UK market.

(Reporting by Padraic Halpin Editing by Jeremy Gaunt)