IMF keeps its sharp eye on the Irish Economy

^{Tom Ferris is a Consultant Economist specialising in Better Regulation.
He was formerly the Department of Transport’s Senior Economist.}

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The International Monetary Fund (IMF) published its most recent report on the Irish economy earlier 0n 19 January. It concluded that Ireland is enjoying robust growth, but that challenges remain. It went on to counsel caution as regards “…the unfinished task of rebuilding economic resilience and increasing the room for policy manoeuvre”. You can see the full report here.

IMF Process

How was the evaluation undertaken? A staff team visited Ireland for a week last November, collected economic and financial information, and discussed with Irish officials the country’s economic developments and policies. The staff report was completed back at the IMF’s Headquarters in Washington, D.C., on 15 December 2015. Then on 15 January 2016, the Executive Board of the IMF considered and endorsed the staff appraisal, without having to hold a meeting.

Some Key Statistics

The IMF report contains a myriad of statistics and figures. Just one table has been assembled for this blog, to give a flavour of projections that the IMF has made for the Irish economy. The table projects an average growth of 3.2% for Gross Domestic Product (GDP), and 3% for Gross National Product (GNP), over the next five years. Investment is projected to grow at an average rate of 6.2%, with private consumption growing at the lower average rate of 2.6%. Much faster growth in investment is to be expected, as “catch-up” is required following the cutbacks experienced during the fiscal crisis years. The unemployment rate is projected to decline to 6.9% in 2020, less than half of what it was in February 2012, when it peaked at 15.1%.

Table: IMF Projections, 2015-2020
		2015	2016	2017	2018	2019	2020
GDP (%)		6.3	4.2	3.3	3.1	2.7	2.6
GNP (%)		5.3	4.0	0.2	3.0	2.4	2.3
Private consumption (%)		3.3	3.1	2.7	2.5	2.5	2.1
Gross Fixed Investment (%)		13.6	7.6	6.3	6.1	5.8	5.1
Unemployment (%)		9.6	8.5	7.7	7.2	6.9	6.9
Consumer Prices (%)		0.2	1.5	1.6	1.7	1.9	2.0
Source: IMF Estimates, January 2016

 

Some Challenges

The IMF report acknowledges that the economy continues to improve rapidly. However, it argues that a number of internal and external challenges need to be faced. Here are six headlines from the report:

• Upward pressure on property valuations persists, but prices remain below levels prior to the boom.

• In the near term, the main risk is of disruptive asset price shifts resulting from a reassessment of global growth prospects, geopolitical developments, or uncertainty around the pace of U.S. monetary policy normalization.

• Economic recovery has supported repair of the banking system, where more remains to be done.

• Achieving durable bank profitability while maintaining prudent lending practices remains a central challenge.

• Faster balance sheet clean up is needed to boost banks’ resilience to shocks and to support future credit growth.

• While it is appropriate to share some fruits of the recovery after years of difficult adjustment, fiscal discipline must be maintained to rebuild room for policy manoeuvre.

 

Fiscal Policy

The IMF devotes a whole section of its report to fiscal policy. It acknowledges that it is appropriate to share some fruits of the recovery after years of difficult adjustment, but goes on to argue that fiscal discipline must be maintained to provide room for policy flexibility. There is no doubt that the strong economic growth in 2015 enabled the fiscal targets to be met, despite an easing of the budgetary stance. However, the IMF believes that while

“the headline fiscal outperformance is commendable…the decline in public debt would have been larger had the full revenue over performance been used for deficit reduction”.

Looking to the medium-term, the IMF stresses the importance of channelling fiscal space in the outer years to debt reduction rather than tax cuts. As regards further reductions in the Universal Social Charge (USC), the IMF staff, in this latest report, are crystal clear in their opposition – the full quotation is set out in Box 1.

Box 1: IMF Staff argue against further cuts in USC “While supporting in principle the reduction in distortionary taxes, staff noted that the impact of USC changes appears regressive, with half of the benefit accruing to households with incomes above €70,000 (about twice the median wage in Ireland). Staff also emphasized the risks associated with tax base erosion and argued against further reduction of the USC, which has played an essential role in restoring a sustainable revenue base. The authorities indicated that the very progressive nature of Ireland’s tax system made virtually any change regressive. However, post Budget 2016 it is estimated that the top 1 percent of income earners will pay 22 percent of the total income tax and USC collected, up from 21 percent in 2015. In addition, the benefits from the tax measures in the budget were capped at an income level of €70,000 such that those with incomes above this level only benefit to the same extent as those with incomes at or below that level. The authorities also pointed out that wage and employment growth would help maintain nominal revenues despite the lower number of workers subject to the USC in 2016” Source: https://www.imf.org/external/pubs/cat/longres.aspx?sk=43630.0

 

Housing

As regards housing, the IMF welcomes the Irish Government’s measures to boost the supply of housing in addressing the housing market imbalances. The IMF believes that the measures

“… should help reduce building costs and could jump start construction activity, particularly of lower-cost homes where profit margins are tighter”.

However, it argues that administrative measures on rents could reduce the return on investment properties and thus dissuade construction.

Overview

The IMF plays a very useful role in providing external evaluation of how economic policy is being rolled out in Ireland, while giving advice as to policy changes that could benefit the economy.  Overall, the IMF report concludes that the priority for the Irish Government is to ensure that continuing economic growth and job creation is achieved. That will require balancing the budget over the next few years through a phased and steady adjustment. Room should be provided to ensure increased public investment. That requires rigorous assessment of the quality of capital projects to ensure any investments made avoid growth bottlenecks.