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Wednesday 21 February 2018

Best and worst scenarios if we don't meet the goals

Thomas Molloy

Thomas Molloy

Best scenario

THE International Monetary Fund is a little like the American actor Mr T: fierce on the outside, but gentle on the inside.

While the IMF caused massive suffering to many ordinary people in South America and Asia when Mr T was starring in 'The A-Team' on television back in the 1980s and 1990s, today's IMF is a bit of a softie and has proven reluctant to unilaterally stop funding countries, no matter how recalcitrant the recipient nation is.

Hungary is one example where relations between the IMF and that country's increasingly strange government have not run smoothly. Budapest agreed an €18bn funding package with the IMF and EU in 2008 but there have been disagreements about many issues since then. The arguments were so fierce at one stage that the IMF walked away from discussions in 2009 -- but the Washington-based organisation never turned off the funding tap and has since patched things up with a new government.

It has been much the same in Greece, where the government has also failed to meet targets since a bailout was agreed last May. Despite the Greeks failing to implement the sort of structural changes required by the IMF, officials with the European Union and the fund recommended in March that Greece receive its fourth round of bailout financing.

The officials said that Greece was broadly on track with its economic recovery programme, although it has failed to push through unpopular structural changes and commit to large-scale privatisation. Like Ireland, Greece has struggled to bring down debt; promising a budget deficit of 7.4pc of GDP by the end of the year, although the deficit is currently running at 9.5pc.

"There have been some delays and shortfalls but this should not detract from the fact that this very ambitious programme is broadly on track," Poul Thomsen, the head of the IMF's mission to Greece, said at the time.

Expect to hear similar words from the IMF team when they leave Dublin later this week. And expect the money to keep flowing.

Worst scenario

THE combined slippage on the public finances forecast by the IMF would require an extra emergency budget on the scale of the 2011 horror to return to the plan inherited by the Coalition and agreed with the EU and the IMF.

That is what you get if you add up the €5bn difference between the IMF forecasts for budget deficits to 2015 and those in the plan.

Growth is the key to the differences. In December's Budget, the Department of Finance forecast average growth of 2.75pc to 2014: the IMF thinks it will be less than 2pc.

The next four Budgets are supposed to produce an overall adjustment of €9bn. Were that to become €14bn, it follows that each of those Budgets would require at least an extra €1bn in taxes and cuts, meaning each would take an average €3.5bn out of household income and the economy.

To put that in perspective, the Universal Social Charge introduced this year will raise €430m a year for the Exchequer. The changes in tax credits and bands produce more than €1bn.

New taxes in areas such as property and water are on the way, and VAT is to be increased, but similar income tax and social charge rises would seem inevitable in such a scenario.

On the spending side, reductions in child benefit and social welfare, while they feel like taxes, count as spending cuts and will bring in €600m this year.

Departmental spending was slashed by around €2bn in the Budget. Doing that each year for four years shows the long-term challenge to get the Croke Park savings.

The great argument will be whether the €5bn correction should actually be demanded. The IMF figures also show the underlying public finances in reasonable shape by 2015, when debt costs and the effects of slow growth are excluded.

The IMF will probably want some action on the slippage -- and the EU possibly more -- but the well must be getting close to dry.

Irish Independent

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