IMF pushes Donohoe for action on tax change

The IMF has aimed an early warning shot at Paschal Donohoe, telling the finance minister to avoid any more huge spending over-runs on healthcare and to get on with significant tax changes, including the local property tax, Vat, and the USC.

In its most prescriptive warning yet, the IMF said that though the “dynamic” economy and government finances are in good shape, the country needs to face up to substantial risks from Brexit and reforms to the global corporate tax regime that could undermine Irish prosperity.

Unusually, the report spells out in great detail what the fund wants, as Mr Donohoe makes early preparations for October’s budget. It tells Government:

• To stop postponing changes in the local property tax and go back to the three-yearly assessments of home property values, but concedes the rate of the annual tax base could be capped.
• There is room “to further streamline” five different rates of Vat, after praising the Government for hiking the Vat hospitality rate.
• That it wants the USC to be included in a new income tax “with somewhat higher rates, broader base, and more tax bands” but to preserve the amount raised by the tax and its “income redistribution features”.
• And it tells Government to step up its plans to meet climate change targets in agriculture, transport, and housing, through higher carbon taxes.

Turning to expenditure, the IMF wants the Government to undertake a significant review of all health spending and to look closely at how it will control costs as it ramps up plans to spend billions on infrastructure in the coming years.

Last year, the Department of Finance was forced to submit a supplementary budget to cover a €700m over-run in day-to-day health spending, while cost over-runs in high-profile capital projects have raised new concerns about spending controls.

“A thorough healthcare review is needed to halt continuous spending overruns, which undermine the integrity of public finances,” the IMF report says.

“The enlarged capital budget and introduction of the investment tracker are welcome, but improvements in planning, selecting, costing, and ex-post assessment, including of public-private partnerships, are needed to improve the efficiency of Ireland’s infrastructure investments,” it says.

Echoing the concerns of other watchdogs such as the Irish Fiscal Advisory Council, the IMF report also focuses on huge increases in corporation tax revenues flowing into government coffers, which have gone to fund spending overruns. “To safeguard its reputation, Ireland should engage constructively in multilateral efforts to address digitalisation and tax avoidance.

“With a more level international taxation playing field, the impact on the economy of such measures would be mitigated by the country’s various other competitive advantages such as its welcoming business environment and qualified labour force,” the IMF notes.