A smaller, better targeted Budget 2024 package would have been “less costly” for the Government while still protecting the most vulnerable with less risk of further stoking inflation, the International Monetary Fund (IMF) has said.
The Republic should also look at ways of strengthening the efficiency of public investment, including streamlining the judicial review process to reduce “uncertainty” around large-scale projects, according to the Washington-based fund.
In a document published on Friday following its regular health check of the Irish economy, the IMF warned that the global economy was facing “considerable external risks”, not least from the war in Ukraine and the Israel-Hamas conflict.
“Furthermore, Ireland’s highly open, small economy would likely be significantly affected by deepening geoeconomic fragmentation in the coming years and changes in international taxation could have more consequences than currently envisaged,” it said.
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Against this backdrop, the IMF said the risk of a “retrenchment” by multinational companies, a small number of which account for a large proportion of the State’s corporation tax revenues, presented risks to the public finances as well as employment.
However, IMF mission chief for Ireland, Yan Sun, said the risks associated with the sector were not all on the downside and that more needed to be done to increase linkages between foreign companies and indigenous Irish business.
“I think this is the million, billion dollar question,” she told reporters at a briefing on Friday. “What we have seen here is that productivity growth, productivity spillover from the multinationals to the domestic indigenous sectors has been fairly limited.”
Overall, the IMF said Irish economic growth was expected to moderate this year from “a very high base” after several years of rapid expansion.
It now expects Irish gross domestic product (GDP) to grow by 1.2 per cent this year and 2.6 per cent in 2024, down from an average of 12 per cent between 2021 and 2022. This is lower than the Central Bank’s most recent forecast of 2.9 per cent growth this year.
Ms Sun said the more important figure to look at for the Irish economy was GNI*, a metric of economic growth that seeks to strip out distortions from multinational activity. The fund expects Irish GNI* to expand by 2.4 per cent in 2023.
Inflation, meanwhile, is expected to average 5.5 per cent this year, falling to 3.2 per cent in 2024. However, the rate of Irish consumer price increases was not expected to fall back to the European Central Bank’s 2 per cent annual target until 2025, it said.
“Tighter financial conditions, supply side constraints and weakening external demand are expected to weigh on the domestic economy,” the IMF said. “At the same time, a strong labour market, a recovery of real incomes as inflation recedes and a rundown of excess household savings accumulated during the pandemic should support private consumption in the near term.”
With inflation still elevated, the IMF said fiscal policy should avoid adding to aggregate demand. It concluded the Government’s €14 billion Budget 2024 envelope comprised a “slightly expansionary stance” when a smaller package could have sufficed.
“A smaller and better targeted package would have been less costly while still protecting the most vulnerable,” it said. “As inflation continues to recede, one-off cost-of-living measures should be phased out.”
The IMF also warned in its concluding statement that the Government’s Housing for All strategy should be “further complemented” by supply-side measures aimed at addressing affordability, land use and construction productivity.
“Measures providing greater certainty to developers, such as improving the transparency and certainty about approval processes, as well as accelerating the process are also required,” it said.
It also recommended the replacement of existing rent caps with “more targeted support” for poorer households.
“What international experience says is increasing supply has proven to be a far more effective way of providing affordable rent than implementing rent controls,” Ms Sun said.
