IMF urges more tax and spending to protect growth

By Geoff Percival

The IMF has urged the Government to abolish the special 9% Vat rate for the tourism and hospitality sector, prioritise spending on infrastructure and healthcare, and opt for tax increases rather than cuts in future budgets.

In its latest post-bailout health check on the country, the IMF said Ireland’s public finances have continued to improve, but noted vulnerabilities still persist.

Construction of student apartments to the rear of the former Beamish & Crawford Brewery in Cork. Pic: Larry Cummins

“The policy challenge is to harness the strong economic momentum to avoid a new boom-bust cycle, address remaining crisis legacies, and bolster the economy’s resilience in the event adverse risks materialise,” it said.

It added: “To this end, fiscal policy should become countercyclical, while making room for much-needed infrastructure investments. 

"This would involve broadening the tax base, which is also prudent in view of the high dependency on possibly volatile corporate tax revenues.”

It said further action is needed to boost housing supply in a sustainable manner, efforts to repair the banks’ balance sheets need stepping up and Brexit preparations need to continue.

The IMF said Ireland should pursue a small budget surplus in 2019 and target a lowering in the Government’s debt-to-GDP ratio to around 50% over the medium term.

Noting the vulnerability of the country’s corporate tax receipts, the IMF said a tightening of policy in order to build fiscal buffers against future shocks “remains a priority”.

As part of a broader tax base, the IMF envisages a reversal of the special 9% Vat rate for the hotels sector —something previously estimated to be worth around €500m per year to the exchequer — and an increase of the excise rate on diesel.

Tax breaks and exemptions and preferential rates should be eliminated, it said, while a better targeting of tax expenditures “could provide significant resources”.

It added that future tax windfalls emanating from the activities of multinationals should be used to reduce public debt or to increase the planned ‘rainy-day fund’.

On housing, it advocates the Government increasing supply via social housing initiatives but argued that house prices could be further increased by adding rent caps and/or increasing the amount of money first-time buyers can borrow.

It has suggested a gradual reform of the property tax and warned that the operations of the Home Building Finance Ireland fund, set up in last October’s budget to help finance fresh house building, “should remain limited in scope and subject to robust governance and prudent risk management”.

The IMF also reiterated the dangers to the Irish economy of a hard Brexit.

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