IMF calls for enhanced property tax and fewer Vat reductions to broaden revenue base 

Other recommendations include a broadening of the income tax base and boosting housing supply

IMF representative Yan Sun said Ireland should use 'its currently strong economic position to prepare for the future and future-proof the economy' as well as  'address its existing vulnerability, improve productivity, and secure lasting prosperity'.

The International Monetary Fund (IMF) has called on the Government to increase its tax base by enhancing property taxes, broadening personal income taxes, as well as cutting the number of items subject to the reduced Vat rate in order to provide more sustainable revenues.

Following an IMF delegation's mission to Ireland, it produced an assessment of the country’s economy, providing recommendations on key policy areas the Government should focus on.

In the area of fiscal management, the agency said the Government should accelerate “public investment efficiently while closely controlling current expenditure growth and minimising spending overruns”, broaden the tax base, as well as strengthen the national fiscal framework and budget credibility.

In the financial system, it should maintain close monitoring of financial stability risks.

Lastly, in terms of structural policies, it recommends boosting housing supply, further progress on the green energy transition, as well as supporting a deepening of the EU single market.

Speaking to reporters in Dublin, assistant director at the European department in the IMF Yan Sun said Ireland should use “its currently strong economic position to prepare for the future and future-proof the economy” as well as  “address its existing vulnerability, improve productivity, and secure lasting prosperity”.

On the fiscal piece, Ms Sun said they were looking to see a broadly neutral fiscal stance which does not inject any more additional stimulus into the economy given the economy is already operating at its full capacity.

“A broadly neutral stance would help build buffers for future shocks and spending needs stemming from aging and the green transition,” the IMF said.

She said they would like to see the Government broaden the tax base, which could include enhancing the property tax, broaden the personal income tax base, as well as reducing the number of items that are subject to the reduced Vat rate.

From July 1, Vat charged in the food-service hospitality sector will be reduced to 9%, which is expected to cost €232m through the end of this year and €681m over a full year.

When asked about these kinds of tax measures, Ms Sun said: “Once you have many items that are subject to reduced rates, that reduces the efficiency of the Vat system.”

Ms Sun said the IMF’s view was that Vat rate cuts had been used to provide support to households and certain businesses, but they are “broad-based” and often these broad-based approaches largely benefit higher-income households rather than vulnerable households.

She added the IMF was also not in favour of the delay in the increase in carbon tax from May 1 to budget day in October.

Ms Sun said Ireland had potential when it came to developing renewable sources of energy, and the carbon tax increase plays an important role in that green investment.

On the proposed savings and investment accounts, which are expected to include favourable tax measures to encourage use, Ms Sun said while these may lower revenue, the IMF supports this approach as it “helps to promote private investment” and helps move “savings in the banking system into more productive investment”.

The IMF said the Irish economy was expected to grow at a slower but robust pace, but near-term growth momentum was expected to face headwinds from the war in the Middle East and the resulting higher energy prices and global uncertainty.

It projects modified domestic demand — a measure of the Irish economy that strips out the impact of multinationals — growth is projected to moderate from almost 5% in 2025 to about 2.5% in 2026-27.

Headline inflation is expected to rise to about 3.5% on average this year, and return to about 2% in 2028.

On housing and infrastructure, the IMF said progress had been made, but achieving housing targets would “further reforms, including to streamline the complex planning and judicial review process”.

“Enhancing apprenticeship and training programmes could alleviate the skill shortage and improve productivity in the construction sector. Crowding in private capital — through providing planning certainty and infrastructure — could also help boost housing supply,” the IMF said.

The IMF added the new rent control framework, while maintaining strict controls for existing tenants “introduces more predictability and flexibility into the rental market, which could increase rental supply”. 

It recommends removing rental controls to “further boost rental supply, while continuing to support vulnerable households”.

On the impact that AI might have on the economy, the IMF said that Ireland is “relatively more exposed” to the technology than other advanced economies given the concentration of tech and financial services firms here.

“While AI can be associated with substantial productivity gains, realizing these gains will require continuous reskilling and upskilling as labor demand shifts towards advanced digital and analytical skills,” the IMF said.

“Reforms that foster innovation and growth would help leverage the abundant talent. More broadly, through policies aimed at helping workers adapt and acquire new skills and enhancing labor mobility, including through affordable housing, Ireland can strengthen its competitiveness while ensuring that adjustment pressures do not undermine inclusive growth.” 

Previously research by the IMF suggested that 40% of jobs globally could be vulnerable to AI.