Wednesday 16 October 2019

IMF demands tax hikes, spending cuts 'to protect hard won gains'

Christine Lagarde, head of the IMF
Christine Lagarde, head of the IMF
Christine Lagarde, managing director of International Monetary Fund (IMF), listens to a question during a news conference during the International Monetary Fund (IMF) and World Bank Group Spring Meetings in Washington, D.C., U.S., on Thursday, April 10, 2014. Stronger U.S. growth this year and next will help the world economy withstand weaker recoveries in emerging markets including Brazil and Russia, the IMF said this week. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Christine Lagarde

Colm Kelpie

THE INTERNATIONAL Monetary Fund has become the latest organisation to call for the full €2bn in tax hikes and spending cuts in the Budget.

The Washington-based lender said the Government should stick with the planned adjustment to protect "hard won gains" rather than simply aim to meet next year's crucial EU deficit target

The call for another austerity budget was also made by the Fiscal Advisory Council earlier this week, while the European Commission said last week that it wants more than the €2bn in cuts and tax hikes.

In its first post-bailout review, the IMF said the Irish economy is beginning its recovery from crisis but stressed determined efforts were "vital to sustain growth".

"Unemployment is still high even after a significant decline in recent years, and public and private debt burdens remain a source of risk to the strength and durability of the recovery, in part as very high NPLs (non-performing loans) could weigh on a revival of lending in the medium term," it said.

The IMF said the Government should impose an adjustment of about 1.25pc of gross domestic product.

The Central Statistics Office estimated GDP last year at €162bn, with 1.25pc of that roughly €2bn.

"Anchoring the quantum of adjustment rather than the headline deficit would also avoid procyclical responses to revisions in growth projections," the IMF report said.

The report also makes reference to the recent election and blames the fall in support for the Coalition on the "as yet" limited benefits of austerity for people.

The IMF also noted Eamon Gilmore's resignation as Labour leader, and said Joan Burton had indicated she would stick to the budget targets for 2015.

Ms Burton previously told this newspaper that the €2bn adjustment would be neither necessary nor desirable.

To have a balanced budget as planned by 2018, the IMF said discretionary measures would need to be a contributor to adjustment in addition to restraint in welfare and pay.

The IMF said growth is estimated at about 1.7pc this year – fractionally less than the Department of Finance's estimate of 2.1pc – and firming to almost 2.5pc in 2015.

It said revenue performance in the first five months of the year had been solid, and said authorities had managed to keep spending largely under control despite pressure in Health.

Gross public debt is expected to ease to 121.7pc of GDP by the end of the year.

Household debt means savings rates are expected to remain high, with slow recovery in personal spending relying on employment and income growth and declining drag from austerity, it said.

The number of bad loans in the banks remain high at 27pc at the end of last year, it said, and called for the majority of mortgages in arrears to be resolved by the end of 2014.

EY more optimistic on growth forecast

ERNST & Young (EY) has a slightly more optimistic view on the economy this year than the International Monetary Fund (IMF).

The accounting giant believes gross domestic product will rise by 2pc in 2014, compared with the IMF's view of 1.7pc. This is more in line with the 2.1pc forecast from the Department of Finance.

EY upgraded its forecast claiming the exit from the bailout, the fall in borrowing costs and an improvement in the country's credit rating have all been factors for the more optimistic outlook, according to its Economic Eye Summer 2014 forecast.

Professor Neil Gibson, EY Economic Eye's adviser, said Ireland was showing the characteristics that are required to put the economy back on a robust footing.

But he warned: "Despite the raft of positive economic indicators, including the most recent upgrade by ratings agency Standard & Poor's to Ireland's international credit rating, continued recovery is by no means assured, with a number of valid concerns including fragile consumer confidence, continued difficulties in the banking sector and limited private sector lending, potential pent-up repossessions in the housing market and the uneven pace of recovery in the regions outside Dublin."

EY said consumer spending is expected to rise by 1.7pc this year while export growth is expected to increase by 3.7pc following two relatively sluggish years.

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