IMF warns Ireland in ‘uniquely vulnerable’ position

IMF warns Ireland in ‘uniquely vulnerable’ position
The IMF has said housing supply needs to be improved.

The International Monetary Fund has urged the Government to “strengthen fiscal buffers, address key structural bottlenecks to growth, and continue preparing for Brexit” in its latest assessment on the country’s finances.

The IMF executive board report said: “While the outlook remains favourable, there are challenges from domestic capacity constraints and external downside risks, notably a no-deal Brexit, escalation of global protectionism, and adapting to ongoing international tax changes.”

The body’s directors said they “saw merit in saving additional corporate tax revenue, broadening the tax base to reduce dependency on uncertain revenues, reforming personal income taxation to make it more efficient, and enforcing spending limits”.

They said they supported a rainy-day fund “as a fiscal tool for unforeseen events and welcomed the authorities’ commitment to using all proceeds from financial sector divestments to reduce public debt”.

The assessment said a no-deal Brexit would leave Ireland “uniquely vulnerable”.

“If this risk were to materialise, the Government should let automatic fiscal stabilisers operate freely and provide targeted support to hard-hit sectors.

“A fiscal stimulus may be called for, depending on the severity of the downturn in the broader economy. In case of a sharp credit contraction, directors considered that the countercyclical capital buffer could be released,” the report said.

Close co-operation with the EU and the UK “should continue to avoid cliff-edge risks related to Brexit” in relation to the collection of data, it said.

“Directors noted the authorities’ efforts in data collection on the large and fast-growing non-bank sector.

“They encouraged the authorities to further improve data collection, closely monitor risk build-up, and develop system-wide stress testing. In view of the sector’s global reach, directors emphasised the need for continued engagement in international co-operation,” the report said.

Housing supply had to be improved, it said, as well as boosting domestic firms and improving conditions for working women.

“Directors underscored the importance of addressing key structural bottlenecks to growth. They welcomed the progress in the provision of social housing and encouraged the authorities to continue their efforts to boost housing supply, including through further rationalising building regulations. 

"Directors recognised the need to boost productivity in domestic firms, also by direct funding of innovation, employee training programs, and infrastructure investments. They supported the authorities’ measures to increase female employment, notably through the affordable child care program, and encouraged further aligning educational paths with business demand for high-skilled jobs,” the report said.

The IMF report coincided with EY’s latest Economic Eye report, which said it revised its growth projections upwards from 3.9% to 4.1% based on corporate tax receipts and 81,200 net new jobs in the first quarter.

However, firms are struggling to secure the talent they need at an affordable price and will soon have to face even higher costs as a result of rising inflation, the report warned.

EY Ireland chief economist Neil Gibson said: “Rising salary costs and accelerating inflation are in many ways the price of success and a welcome endorsement of economic performance. However, this does create a cost pressure for firms and this is accelerating the exploration of innovative digital or technological solutions to reduce overheads. We expect a moderation in the rate of job growth across the island, given the limited labour supply, but migration into the Republic will help support over 210,000 net jobs over the next five years.”

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