September 24, 2022

Finance & Economy

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Irish economy to grow, inflation to fall next year

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The International Monetary Fund has said growth in the Irish economy is expected to “remain strong”.

But it warned that risks are “tilted to the downside” as there is “substantial uncertainty” due to the fall-out from the ongoing war in Ukraine.

The IMF forecasts growth in GDP (Gross Domestic Product) terms of 6% this year and 5% next year. It expects inflation to average 6.5% this year before falling to 2.8% next year.

Officials from the IMF have been in Ireland for the past ten days as part of its annual ‘Article IV Mission,’ which is a kind of health-check on the economy.

The IMF is also recommending that the cap on bankers’ pay and bonuses be removed.

In a statement to coincide with the conclusion of its mission, the IMF says several pre-pandemic challenges in the economy remain, including an “insufficient supply of housing”.

It also highlights gaps which it says exist in investments in social services.

It says the Government has some room for further investment in certain social services, infrastructure and climate-related spending. However, it cautions that these must deliver value for money.

It also says that any spending to offset the recent surge in inflation should be directed as much as possible to vulnerable groups rather than being broadly based.

The IMF has also concluded a year-long monitoring of the financial system. It describes the Irish banking sector as “broadly resilient”.

As well as several technical recommendations on regulatory issues, it is also recommending that the cap on bankers’ pay and bonuses be removed.

It is also understood to be in favour of removing the banking levy.

In its statement, the IMF says “…it is important to resolve lingering issues from the Great Financial Crisis.”

These are understood to also include improving how the legal system deals with bad property-linked debts and selling Government shares in banks.

It warns that while the fiscal outlook in the short term looks very strong, one of the lessons from the crash is that this can change very quickly.

It says there’s a need for strengthening the links between multinational businesses here and local companies “to make growth more inclusive”.

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According to the IMF, Ireland is making progress when it comes to its “ambitious climate agenda” but “more clarity is needed” on the measures necessary “to achieve the stated quantitative targets”.

It also says that “just transition” measures to support affected groups “should be a priority”.

On the economy, it recommends that the tax base needs to be widened because of uncertainty over the level of future corporate taxes and an ageing population.

It advises that preferential VAT rates should be scrapped and what the IMF describes as “very low” property tax rates should be gradually increased in order to broaden out the tax base.

It compares “excessively low” property taxes here with other European economies where property taxes are generally equal to around 0.5% of market value.

The IMF says any gains from corporation tax that are higher than expected should be saved in the Rainy Day Fund.

It warns that while the fiscal outlook in the short term looks very strong, one of the lessons from the crash is that this can change very quickly.

It also observes “bottlenecks” in some sectors when it comes to entering certain professions and says more reform is needed when it comes to the apprenticeship system.

The IMF also comments that reforms are necessary when it comes to how the legal system handles insurance claims and the planning system.

The group believes there needs to be more transparency and clarity when it comes to the costs and duration of legal action. This also applies to the recovery of bad loans.

Government’s response to IMF review

Minister for Finance Paschal Donohoe said he welcomed the “constructive” discussions with the IMF.

He added: “It must be stressed that resources are limited and that fiscal policy must be carefully balanced to avoid further inflationary pressures and a harmful wage-price spiral.”

Minister for Public Expenditure and Reform Michael McGrath said: “We must strike the appropriate balance between supporting the economy and containing inflationary pressures.

“As this is a challenge faced by many advanced economies, engagement with the IMF on this shared concern is valued.”

The full IMF Article IV report is expected to be published in July.