The International Monetary Fund has said the Government’s new economic plan steers fiscal policy “broadly in the right direction” but it has warned that current favourable conditions could worsen.
The IMF’s tacit support for the spring statement came as the European Commission said a “more ambitious” budgetary target next year would accelerate debt reduction and help protect against any future shocks.
The two institutions and the European Central Bank were in Dublin this week for the first of two annual inspections in which the troika bodies examine the State’s progress since leaving the bailout in late 2013.
As their mission concluded, both the IMF and the commission expressed concern about the high rate of long-term mortgage arrears.
Confirming he will leave the post early, Central Bank of Ireland governor Patrick Honohan said he would have liked to have seen more progress to settle the arrears crisis. Although Prof Honohan said the economy still bore the damage wrought by the crash, it was on the road to recovery. He had “no message” on the spring statement but said high debts meant the economy remained fragile and should be managed in a prudent manner.
“A lot of the legacy damage is still there, it’s there in households, it’s there in firms, it’s still there in banks. There is certainly a lot less fragility than there was,” Prof Honohan said.
Economic rebound
In a report saying the economic rebound was in full swing, IMF mission chief to Ireland Craig Beaumont said the ECB’s new bond-buying programme was aiding the recovery.
Mr Beaumont said it was critical that any unwinding of savings in public sector wages be “gradual” and that efficiency gains continued. “After years of difficult consolidation, there are strong public expectations for a recovery dividend.
“Yet the particularly high growth in 2014–15 is likely to slow somewhat and very favourable market conditions could deteriorate in time,” he said.
The Government plans an expansionary budget in October with between €1.2 billion and €1.5 billion available in 2016 for tax cuts and increased expenditure.
Mr Beaumont said a “measured amount of new spending and tax reforms each year” must fit within a steady plan to eliminate the deficit. Such measures should focus on supporting lasting growth and job creation, he added.
“The spring economic statement steers fiscal policy in broadly the right direction.” Although the IMF said it would be appropriate for the Government to target a lower deficit next year than foreseen in the statement, it said tax revenues could exceed the prudent official projections.
“Such overperformance must be saved to ensure an adequate pace of adjustment,” the Washington-based fund said.
“Beyond 2016, the macroeconomic framework is sound and debt could fall faster than projected in the event of the disposal of Government stakes in the banking sector,” it added.
“Transparency would be enhanced by also providing deficit and debt projections consistent with the stated policy to limit fiscal adjustment to the minimum under EU fiscal rules.”
Of the high rate of mortgage arrears, the IMF said settlements would vary as it called for greater resolution efforts.
“To advance restructuring in cases where that is feasible, close supervision of areas where banks can improve needs to be complemented by steps to make legal proceedings more efficient and to increase utilisation of the personal insolvency regime.”
