Business

Friday 22 September 2017

'Brexit, housing supply and international corporate tax reforms putting Irish economy at high risk', IMF warns

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Cormac McQuinn

Cormac McQuinn

The International Monetary Fund (IMF) has warned that the external risks to Ireland's economy are high, listing Brexit and international corporate tax reform among the threats.

Meanwhile, the rise in housing pressures, is also said to be among the challenges faced by the country.

The IMF said that the government's Help-to-Buy initiative for first-time buyers may add to demand pressures and welcomed the planned review of the scheme.

It also stressed the need for a broad and stable tax base, particularly due to the government's intention to continue cutting the Universal Social Charge (USC).

The international financial institution this afternoon published a concluding statement from its 2017 Article IV review.

That's an annual mission in Ireland which was carried out over the last two weeks and included meetings with ministers and government officials.

The report says that "economic recovery is well under way" and that the medium term outlook "remains positive".

"Healthy growth is expected to continue, albeit at a moderating pace. Nonetheless, Ireland faces several challenges," it adds.

"Brexit represents the most pressing and far-reaching challenge for Ireland.

"While the impact to date has been modest, the overall effects over the medium term are expected to be negative and significant."

Risks are said to be most acute for traditional sectors depending on trade with the UK such as agri-food and tourism.

The report says that the special issues related to the border with Northern Ireland have also been recognised and  "The authorities are actively engaging with partners in the UK and across Europe, and working domestically to develop a set of measures to respond."

"Ensuring timely and well-targeted action will be key," the IMF advises.

Ongoing changes in corporate taxation at the international level and discussion of further reforms in the US and the EU are contributing to "uncertainty".

This is due to "the sizable role of multinationals in the economy and their substantial contribution to the tax base".

Among potential tax changes in the US is President Donald Trump's wish to reduce the American corporate tax rate from 35pc to 15pc.

The uncertainty "further reinforces the need for a broad tax base, large fiscal buffers, and continuing efforts to reinforce the dynamism of the domestic economy," the IMF found.

The report says housing pressures have risen "driven by the mismatch between renewed demand and the lagged supply response following the real-estate bust."

It says that ensuring affordable housing is crucial for the well-being of the Irish population and important to economic competitiveness.

The IMF said the government's Action plan for Housing and Homelessness "appropriately focuses on support for vulnerable families" as well as measures to kick-start expansion in housing supply.

"While signs of progress are emerging, a more robust supply response will take time," the report says.

"The planned review of the recently introduced Help-to-Buy scheme, which may add to demand pressures, is welcome," it adds.

Spending pressures are said to be high while the fiscal space remains constrained.

"Pent-up demand will need to be managed carefully to ensure that resources are maintained to insulate the economy from emerging risks, meet priority social needs and increase investment to strengthen human capital and infrastructure and support broad-based economic dynamism," the IMF said.

Factors that should be considered include the need for a broad and stable tax base.

This is particularly the case "given calls for continued unwinding of the universal social charge and concentration risk associated with corporate taxes."

"A more comprehensive and evenly distributed tax on individual earnings is important if Ireland is to have the resources to address priority needs in a sustainable manner.

"In this context, a review of tax expenditures should be considered. At the same time, reduction of VAT exemptions and aligning property assessments to increasing market values would strengthen revenue," the IMF said.

Prioritising the use of limited fiscal space is said to be "critical"

"Given strong spending pressures, it will be critical to maintain sufficient room for priority social expenditures and needed restoration of growth-enhancing capital spending.

"To this end, the mission welcomes the current expenditure and capital reviews.

"The recently published report of the Public Service Pay Commission also provides support for a transparent and evidence-based process for upcoming discussions of public sector compensation within this broader context," the report says.

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