IMF recommends further spending cuts and increased taxation

THE International Monetary Fund has delivered a very hard-headed review of Ireland’s economy, warning that the path from crisis to stability and recovery was a very narrow one and recommending further spending cuts and increased taxation.

It does not support the more positive outlook for growth forecast by the Government and said GDP growth will gradually recover to 3.5% by 2015.

The IMF points out domestic demand actually contracted in the first quarter of the year and that unemployment has continued to grow.

The report casts doubt on the country’s ability to reduce the budget deficit to below 3% of GDP by 2014, as agreed with the European Commission, predicting a level of 5.9% unless there are further adjustments.

It noted that while early actions to cut back government spending and rescue the banks earned early credibility, this could not be taken for granted.

“With limited fiscal resources for dealing with contingencies, maintaining a steady policy course will require effective mechanisms for oversight and transparency, and high-quality communication to minimise risks and sustain market confidence,” the IMF warns.

Time and again the fund’s annual report underlined the need for continuing active risk management, including ensuring that the consolidation and cutbacks in spending are achieving the intended results and warns the Government must be ready to make further cuts.

One of its recommendations is for a fiscal council to be established as an independent body to scrutinise fiscal policy and review economic forecasts. Sweden established such a body three years ago.

The fund’s analysis exposes many of the underlying weaknesses in the economy, from the heavy reliance on exports by multinationals that deliver little in the way of new jobs and the lack of exports from indigenous companies.

IMF mission chief to Ireland Alshoka Mody said: “Ireland’s export sector is unlikely to be an engine of job growth unless the exporting activity broadens to include domestic exporters and they show a much more lively participation in exports than they have in the past”. He added most new jobs will be generated when consumption starts growing again.

The report highlighted high unit labour costs both as a cause of a drop in foreign direct investment over the past few years and an ongoing block to competitiveness. It points out that the recent apparent fall in unit labour costs just reflects the drop in low-productivity construction jobs and that real productivity increases are essential. The drop in prices reflects the excessively high prices during the boom years, and the report projects that prices will continue to fall in the next two years. Real interest rates have also risen sharply to much higher levels than other EU countries and this will impact on household spending and will slow the pace of recovery.

Unemployment rose higher than normal for the circumstances and the ongoing forecast is poor, with long term unemployment doubling in the past three years. The outlook for older males and for the younger generation was challenging, it warned.

The analysis cautions that the Irish economy may be in a regime in which relatively-modest potential growth and high unemployment reinforce each other.

Banks, while emerging from the worst phase of the crisis, remain weak, with serious liquidity pressures, including over €70bn or 44% of GDP of banks’ obligations due to mature by September, and recapitalisation issues.

Mr Mody said once the rollover process is completed, the planned capitalisation by early next year should give the banks greater ability to obtain market funding and be gradually weaned off public support.

The next steps in the financial sector agenda should be an orderly disposal of the property assets NAMA has acquired, targeted support for homeowners, and an overdue shift to a more efficient and balanced personal insolvency regime.


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