IMF researcher lets Government off hook over property bubble
SEVERAL international bodies, not just the Government, failed to see how the property bubble had artificially inflated Ireland's tax receipts, a paper by a senior International Monetary Fund (IMF) researcher has claimed.
At one point property was contributing almost one-fifth of all tax receipts, but the plunge in house prices and commercial property has now blown a hole in the public finances.
A paper by senior IMF researcher Daniel Kanda highlights the limits of economic models used by the Organisation for Economic Co-operation and Development (OECD) and other institutions when it comes to asset bubbles, with particular reference to Ireland.
The Government may take some satisfaction from the report because it has long maintained that international forecasters also failed to see how vulnerable public finances were to a property crash.
However, the paper makes it clear the author's conclusions "do not necessarily represent those of the IMF or IMF policy''. Instead, the paper is meant to stimulate debate.
The central thesis of the paper is that standard OECD-based methodologies, used by several global bodies in their forecasts, do not put enough weight on the effects of asset price bubbles and other hidden factors.
In Ireland's case, this bias, which made the revenue prospects seem much rosier than they actually were, led to spending rises that created a large hole in the public finances, writes Mr Kanda. He says this will take several "painful'' years to close.
He says there is a strong case for expanding the "standard OECD-based methodology'' to include the "missing elements'' such as asset-price bubbles. The European Central Bank is one of the bodies changing the way it looks at different tax headings, he points out.
"The scale of the collapse in revenues in 2008 was well beyond what could be explained by the standard methodology,'' writes Mr Kanda.
Another senior IMF official warned, meanwhile, that advanced economies faced "acute" challenges in tackling high public debt, and said unwinding existing stimulus measures would not come close to bringing deficits back to prudent levels.
John Lipsky, the IMF's deputy managing director, said in a speech in Beijing yesterday that all G7 countries except Canada and Germany would have debt-to-GDP ratios close to or exceeding 100pc by 2014. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging market nations had also reached a "worrisome level".
"This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up," Mr Lipsky said.
Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won't be enough to bring deficits and debt ratios back to prudent levels.
Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually, compared with pre-crisis performance, Mr Lipsky said.