Long, painful road to recovery lies ahead
IMF says we need to:
- Introduce a 'long overdue' property tax
- Tax or means-test child benefit payments
- Cut public sector pay bill and staff numbers
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Thursday June 25 2009
THE country's economic crisis is one of the worst seen anywhere in the past 60 years and will require a long period of painful correction, the International Monetary Fund says in a new analysis.
The IMF says Ireland's policies are on the right track, but warns that the country still faces huge risks.
Among the measures it recommends are:
- More reductions in the public pay bill and government employment levels.
- Broadening the tax base, including the introduction of a "long overdue" property tax.
- Better targeted social welfare payments and a move away from benefits paid to everyone, with possible taxing or means-testing of child benefit, and tax credits for low-income families.
The IMF says: "The economy is in the midst of an unprecedented correction. The stress exceeds that being faced currently by any other advanced economy and matches episodes of the most severe economic distress in post-World War II history."
The report also warns that Ireland has become the most expensive place to do business in the eurozone.
It says Irish earnings of around €22,000 a year in 1997 were broadly in line with the eurozone average, but a gap of €12,000 has opened up as Irish salaries rose to €35,000 by 2007.
The IMF published its report on the same day that a review of the world economy by the Paris-based Organisation for Economic Co-operation and Development (OECD) forecast that the Irish economy may contract by 10pc this year.
"Substantial spending cuts and increases in taxation are required," the OECD says.
Finance Minister Brian Lenihan welcomed the IMF's view that, on the two issues that mattered most, the Government moved in the right direction.
These are the multi-year plan to contain the budget deficit, which the IMF put at €20bn last year, and the proposed establishment of NAMA.
"This report is both a balanced and realistic assessment of the challenges we face, and also endorses the actions that we are taking," Mr Lenihan said.
"The IMF has highlighted the unprecedented nature of Ireland's current difficulties, the scale of the correction needed to address them and also identifies the risks that remain."
IMF directors generally agreed that the focus should be on spending cuts of €17bn over the next five years, "possibly including a further reduction of the public sector wage bill".
But a few directors warned against too much budget pain, saying that, while fiscal consolidation is an imperative, it should not undermine efforts to arrest the economic downturn.
"Ireland was perhaps the most overheated of all advanced economies," the IMF says, partly because ECB rates were far too low for Irish conditions.
It adds that previous governments should have done far more to counter this by spending restraint and higher taxes.
"Yet dazzling growth and buoyant public revenues prompted tax reductions and expansion of public expenditures that have proved unsustainable," the report says.
"Various commentators, and the IMF, did warn that the seemingly unstoppable growth masked serious imbalances."
Even if action is taken, there will be no early return to growth. "The correction of distortions induced by the nexus of property and financial developments will further pull down potential growth in the immediate future, before it rises back to a 2pc range by the close of the forecast period in 2014," it says.
Potential
NAMA does have the potential to clean up the banks, at no long-term cost to the taxpayer, it says, but recommends that NAMA's remit should extend beyond development loans.
The report stressed that growth will hinge on continued restoration of Ireland's competitiveness. But a few IMF directors cautioned that wage cuts could impair spending and raise the risk of deflation.
Speaking after the launch, the IMF official in charge of the report, Ashoka Mody, said "there was absolutely no reason" to think Ireland would default on its government debt -- a situation which normally requires IMF intervention.
- Brendan Keenan Economics Editor
