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IMF will have direct say in crucial decision for Budget 2012

Fund will weigh up whether to raise taxes or cut spending

Emmet Oliver and Fionnan Sheahan

Published 15/07/2011 | 05:00

The IMF has signalled it will have a direct say over whether the Government opts for tax rises or spending cuts when it pushes through the latest round of austerity measures in Budget 2012.

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The Government is set to take up to €4bn out of the economy in the Budget, but has not yet revealed how much of this will be tax increases and how much will be spending cuts.

The head of the IMF programme for Ireland, Ajai Chopra, said the next review of Ireland's bailout in October would be focusing on this sensitive issue.

He was responding to a question on which would be least damaging to the economy -- tax rises or spending cuts -- and whether the choice should be left to the Government alone.

"I think this is an issue we will have to address in the context of the next review,'' said Mr Chopra.

Economists last night said the IMF was likely to strongly favour spending cuts. Jim Power, an economist with Friends First, said: "I think they will look to have a very hands-on role and they are disposed towards spending cuts over tax rises."

Mr Power said he personally expected that 70pc of this year's budget changes would come through spending cuts, with the rest accounted for by a property tax and water charges.

Mr Chopra's comments came as he delivered an upbeat verdict on the Irish economy, saying Ireland's bailout was "on target'' and growth was starting to appear.

He said Ireland was getting more competitive and more productive. Only international problems and "contagion'' from Europe were forcing up Ireland's bond yields, he claimed.

"Look at the positive elements in the case of Ireland. We are starting to see to signs of growth in the economy and the economy stabilising after three years of very wrenching adjustment,'' he said.

"Banks are being recapitalised and will have significant buffers.

"This Government has developed a great deal of fiscal credibility. The Government has the political will and the determination to implement this programme. If it wasn't for contagion we would be seeing a very different result,'' he said.

Meanwhile, the Government has three months to show it is reforming the labour market and public sector. The European Commission reminded the coalition again yesterday it would be looking at the policies to "the sheltered sectors" in the legal, pharmacy and medical professionals.

European Commission director Istvan Szekely said the reforms were "on track" at the moment and would be looked at in detail by the IMF/ EU in the October review.

Enterprise Minister Richard Bruton's overhaul of the wage-setting system for the low paid also falls under this area. But Mr Szekely said the reforms of the labour market were the Government's responsibility, rather than being dictated by the troika.

"How precisely that is done is for the Government to decide. These are the Government's plans. When we see them we will let you know what we think of them," he said.

Public Spending Minister Brendan Howlin said the Government had "full confidence" it would deliver on the targets set out in time for the next review.

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