Changes to income tax bands and credits may be needed, says IMF

THE IMF has cast doubt on whether Ireland can emerge from the current crisis despite meeting all the targets of the austerity programme and said the income tax system may have to change further in the next three years.

The IMF has halved the growth forecast for next year to just 1% and called for greater EU support, including cutting the cost of borrowing with cheaper loans to replace expensive money pumped into the banks before the bailout.

It rowed back on the demand for the sale of state assets saying due to significant past privatisations, sales of those assets left could only contribute a few percent of GDP. Three months ago they suggested all €5 billion worth should be sold off.

Regarding the programme of reforms required in exchange for the bailout the report warns: “Prospects for programme success remain fragile despite strong policy implementation by Ireland.”

This warning comes on top of figures for the third quarter of the year showing a sharp contraction of 1.9%, which it is feared could push the country into recession.

On taxation, the IMF report welcomed the Government’s plans to broaden the tax base in a way that would lend greater stability to tax revenues.

However, it said such broadening would likely need to include income tax bands and credits.

In this, its fourth review report, the IMF halved the growth forecast for 2012 because of the sensitivity to external developments and warned that the crisis in Europe posed further risks to growth.

If the average rate of growth was just 1% a year between 2012 and 2016, then the ratio of debt to GDP would reach 127% by 2016, which could be unsustainable, growing rather than falling to 111% as set out in the bailout programme.

This would cost in terms of regaining market access, while deleveraging by Irish and other banks and by households would increase the likelihood that the country will not recover under the present programme.

Stronger European support would reinforce prospects for programme success, with positive spillovers for European stability, the report says.

It cites greater support for public investment and SME lending to help growth and job creation — an issue for the European Investment Bank.

It also advocates the conversion of short-term ECB liquidity into medium-term funding for the banks and capital support for vehicles, to cut deleveraging costs and spillovers and temporary equity participation in banks by European partners.

This latter measure, it says, would enhance debt sustainability by refinancing bank recapitalisation programmes or using EFSF flexibility to help Ireland regain market access at reasonable costs.

The IMF warns that political determination to continue with the reforms could be weakened, especially due to the decision to repay bank investors and unguaranteed senior debt holders because this was “perceived as being required to protect the European banking system”.

When asked about writing down bank debt, Craig Beaumont, the IMF’s mission chief for Ireland, said this would not happen for the pillar banks as they needed to maintain credibility while the amount of unsecured debt for Anglo Irish Bank and the INBS had now declined to a modest sum, “so it would not make a material difference”.

He said they were not going to reopen the issue now that the banks had been restructured.