The International Monetary Fund (IMF) recently published its preliminary statement on the Irish Economy, following the visit of its staff during the period 26 April 26 to 5 May 2022. The views expressed in the statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. They make for interesting reading, posing many challenges for our policy makers. The findings can be accessed here.
The IMF Overview: The IMF statement acknowledges that Ireland’s economy has rebounded strongly from the Covid-19 pandemic and that Gross Domestic Product has surpassed its pre-pandemic trend. The projections suggest that economic growth will remain strong at around 5 to 6 per cent, although there is substantial uncertainty due to the indirect impacts from the war in Ukraine. the remaining details of corporate income tax changes and Brexit implementation.
It forecasts that energy and commodity prices will push average inflation above 6 percent this year. The IMF list several pre-pandemic challenges that remain: –
- insufficient supply of housing.
- infrastructure, social, and green investment gaps; and
- the need to strengthen multinational enterprises (MNEs)’ inward linkages to make growth more inclusive.
The IMF statement points to several medium-term challenges, including –
“…more high-quality spending is needed to facilitate the transformation of the economy while at the same time safeguarding fiscal sustainability. The financial sector has weathered the pandemic crisis well and remains resilient, but there is a need to address the legacy scarring effects of the Global Financial Crisis, tackle the factors contributing to high lending interest rates, and continue to strengthen and evolve supervision of the large and growing financial sector which is complex and globally interconnected”.
In addition, the IMF argues that further structural reforms should aim to remove bottlenecks, increase productivity, and reduce remaining inequities.
IMF argues that future fiscal policy needs to be finely balanced:
The IMF points out that out that, in the near term, fiscal policy in Ireland needs to strike a fine balance between countering the headwinds from the war in Ukraine and containing inflationary pressures. Strong tax revenue out-turns and the tapering of the Covid-19 support have provided room for a swift response to mitigate the impact of high energy prices on businesses and households. However, the IMF is of the view that – “…given inflationary pressures, future additional support, if needed, should be temporary and carefully targeted to better support vulnerable segments of the population while maintaining price signals to induce energy savings”.
IMF argues that the medium-term fiscal strategy should support investment needs while enhancing fiscal sustainability:
The IMF statement welcomes the planned medium-term fiscal strategy given the public debt and in view of the remaining uncertainties about changes in international corporate income tax (CIT) rules. However, with a fiscal balance approaching its pre-pandemic level and public debt expected to fall below 40 percent of GDP over the medium term, the IMF statement sees scope for additional social and growth-enhancing and green spending while ensuring value for money. Priority should be given to education, training, health, and infrastructure investment to increase the productivity of the indigenous sectors and promote inward linkages of multinational enterprises.
IMF makes suggestions regarding VAT rates and Property Tax:
The IMF statement argues that the remaining uncertainty regarding corporate income tax rules and long-term demographic trends necessitate – “…a broadening of the tax base, including by removing preferential VAT rates and gradually increasing the very low property tax rates while ensuring adequate social safeguards”. While these suggestions have merit in terms of broadening the tax base, the likelihood of their acceptance by the Irish Government is limited. As regards VAT rates, the Government decision of 10 May 2022 shows that it is in fact extending some preferential VAT rates rather than removing preferential VAT rates. Box B sets out the key parts of the statement from the Minister for Finance regarding the extension of the 9% VAT rate for the tourism and hospitality industry.Source: https://www.gov.ie/en/press-release/29536-minister-donohoe-announces-extension-of-9-vat-rate-for-the-tourism-and-hospitality-sectors/
The IMF’s suggestion that the Government increase property tax rates is ill-timed, given that a revised system for property tax has been introduced only in the past few months. The Revenue Commissioners oversee that system, and they point out that the valuation date for the revised system was 1 November 2021 and the valuation of properties from that date applies for the four-year period from 2022 to 2025. https://www.revenue.ie/en/property/local-property-tax/what-to-do-for-2022/index.aspx . So, while the IMF suggestion is a good one, it its highly unlikely that it would be implemented before 2025.
IMF comments on other areas: The IMF Team also commented on six other policy areas:
- Banking sector: The IMF believe that the banking sector withstood the pandemic shock well, thanks to strengthened regulation and supervision but argue that there is a need to address the legacy scarring effects of the Global Financial Crisis.
- Market-based finance sector (MBF):Ireland is a host to a large market-based finance sector (MBF). The IMF suggest that the Irish Authorities should continue to work with European and International authorities to improve the regulatory framework and prioritize its guidance on the use of liquidity management tools.
- Macroprudential measures: Macroprudential measures are measures that aim to increase the financial system’s resilience to shocks by addressing risks. The IMF statement concludes that macroprudential measures have been effective, but the framework needs to evolve to reflect the growing share of non-bank activity. However,it is suggested that in the future, the limits on mortgage debt should continue to be monitored closely, and, if warranted by developments in unsecured credit, be complemented by limits on total debt.
- Housing supply policies: The IMF recommends that housing supply policies should be further strengthened, with a focus on boosting productivity in the construction sector and improving zoning and the permits processes.In particular, the IMF encourages timely implementation of the Government’s “Housing for All” programme as well as placing further emphasis on policies aimed at enhancing productivity and competition in the construction sector, further improving dissemination of data on local zoning, and simplifying the process to obtain permits.
- Structural reforms: The IMF argue that structural reforms are needed to facilitate post-pandemic labour reallocation and reduce labour shortages and skill-mismatches. Accordingly, it is suggested that policies should focus on facilitating labour reallocation, upskilling and the provision of affordable childcare programs. In this context, the IMF welcomes the strategy in the Economic Recovery Plan to strengthen access to training, including the measures aimed at increasing the take-up of training courses and apprenticeships.
- Climate agenda: The IMF recognises that Ireland is making progress in implementing its ambitious climate agenda, but more clarity is needed on measures to achieve the stated quantitative targets. The approval of a sector-specific carbon budget is seen as a welcome step. However, the IMF argues that to ensure its effectiveness it would be important to specify well-phased measures to achieve the quantitative targets.
Are IMF visits of any benefit: Yes, is the short answer. The IMF plays an extremely useful role in providing external evaluation of how economic policy is being developed and rolled-out in Ireland, while giving advice as to policy changes that could benefit the economy. IMF Teams that visit Ireland can call it exactly as they see it without fear or favour. It is a matter for the Irish Government to decide whether to implement the advice or not. The key advice from the most recent IMF team visit is that the Irish Government should operate a flexible fiscal flexibility to strike the right balance between supporting the economy and containing inflationary pressures. At the same time the IMF suggests that further structural reforms should be introduced in Ireland to remove bottlenecks, increase productivity, and reduce remaining inequities.
Tom Ferris, Consultant Economist.
Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and blogs regularly for PAI. He was formerly the Senior Economist at the Department of Transport, Ireland.