IMF chides Government over expansionary budget but economic outlook remains positive

In its latest report into the economy, the International Monetary Fund praised Ireland for its 'remarkable resilience' in the face of numerous shocks in recent years

Despite warnings, Ministers Michael McGrath and Paschal Donohoe increased spending by 6.1% in the budget beaching spending rules. 

The International Monetary Fund (IMF) has chided the Irish Government for its expansionary budget last month but the overall outlook for the economy remains upbeat but “clouded by considerable external risk”.

The Washington-based fund also warned the Government it was likely to miss its 2030 emissions targets and that it would need to implement additional climate policies across all sectors.

Following a two-week consultation mission to Ireland, the IMF issued its latest report into the Irish economy, which it praised for its “remarkable resilience” in the face of numerous shocks in recent years — achieving one of the highest growth rates in the eurozone between 2021 and 2022.

While that growth is expected to moderate this year and next, the IMF said was expecting it to remain “solid”.

However, the budget for next year was met with more mixed reactions for the additional spending it contained. 

Despite warnings from the Irish Fiscal Advisory Council and the Central Bank of Ireland, the Government decided not to adhere to its own spending rule which limits expenditure growth to 5% a year. Instead, the Government increased spending by 6.1%, along with spending on other once-off measures.

The IMF called the recent budget “slightly expansionary”, adding a smaller and better targeted package would have been “less costly while still protecting the most vulnerable”.

It said additional discretionary support needed to be temporary and targeted at the most vulnerable.

“As inflation continues to recede, one-off cost-of-living measures should be phased out,” the IMF said.

The decision by the Government to funnel excess corporation tax receipts into new sovereign wealth funds was welcomed by the IMF, saying it would help to “de-risk” the country’s public finances from a reliance on temporary, narrow revenue sources such as corporation tax.

Tax take

Ireland’s tax take — particularly from corporation tax receipts — has seen the country’s fiscal position “strengthened considerably”, but the IMF warned the headline figures had some underlying vulnerabilities.

It said while Ireland’s “complex” financial system had remained resilient so far, it would “continue to be tested” by tighter financial conditions.

Ireland may have a positive economic outlook but it is “clouded by considerable external risk”, the IMF warned.

The IMF added Ireland’s progress in achieving key climate commitments “needs to speed up” as Ireland “will likely” fall short of its 2030 emission reduction targets.

The Government’s target is to reduce greenhouse gas emissions by 51% by the end of the decade.

“The introduction of sectoral limits was welcome, but compliance is proving challenging, and almost all sectors are projected to exceed their emission ceilings."

While the IMF acknowledged the authorities have legislated for an annual increase in the carbon tax until 2030, it said they will also need to implement additional policies that deliver emission reductions across all sectors “faster than expected”.

Among the other external risks to the economy cited by the IMF include a further weakening of external demand, a renewed surge in commodity prices, an intensification of conflicts in Ukraine or Gaza as well as tighter-than-expected financial conditions. 

 “Furthermore, Ireland’s highly open, small economy would likely be significantly affected by deepening geo-economic fragmentation in the coming years and changes in international taxation could have more consequences than currently envisaged,’ the IMF said.

Multinationals

The activities of the multinational companies based here also have their risks, as corporation tax receipts continue to be a large proportion of the total tax take.

According to the fund, Ireland’s economic growth is to moderate, albeit from a “very high base”, as tighter financial conditions, supply side constraints, and weakening external demand weigh down the domestic economy.

At the same time, a strong labour market, a recovery of incomes as inflation recedes, and a rundown of excess household savings from the pandemic should “support private consumption in the near term”.

Ireland’s gross domestic product (GDP) — which is heavily impacted by the presence of numerous multinationals headquartered here — is projected to decelerate to 1.5% this year and to 2.67% next year.

Inflation is expected to average 5.3% in 2023 and 3.2% in 2024 before converging to 2% in late 2025, reflecting the impact of ECB’s monetary tightening and the moderation of growth and labour market tightness.

Housing crisis

Another area of concern the agency highlighted was the housing crisis, as well as other infrastructure investment needs.

It said there should be policies to increase housing densities, improve productivity in the construction sector to boost supply, along with the removal of rent caps — which would include the rent pressure zones.

The IMF said rent pressure zones should be replaced with more targeted housing supports, which would help increase rental housing supply.

Measures providing greater certainty to developers, such as improving the transparency and certainty about approval processes as well as accelerating the process, are also required.

Ireland has “large and growing” investment needs and more efforts needs to be directed towards “expediting the planning permission process” as well as modernising regulations.