Ireland must adopt a tight Budget policy in order to maintain sustainable growth as it joins Economic Monetary Union (EMU), the International Monetary Fund (IMF) has said.
It estimated a GDP growth rate for Ireland in 1998 of 8.3 per cent, broadly in line with the Department of Finance's 8.7 per cent estimate, but well below the European Commission's prediction of 11.4 per cent
IMF directors who visited the country earlier this year collecting economic and financial data warn that if the global economic downturn continues, it will have "a significant adverse effect" on Ireland's open economy.
According to the report, some of the directors stressed that more needed to be done to strengthen the supervision of financial intermediaries and cool off the housing market, where prices had escalated due to "the rapid growth of credit". The IMF gives the Government a clear warning that major tax concessions in the Budget could fuel inflation. Most of its directors believed that room for further concessions was limited in the short term, "unless there was firm evidence that excess demand had been eliminated", its statement says.
Echoing the Government line, however, the IMF states that what cuts there are "should be directed to strengthening work incentives for the low paid in order to help ease labour shortages and improve prospects for wage restraint".
However, they recommend that the national minimum wage be differentiated if it is not to have an adverse effect on long term and youth unemployment, meaning that a lower minimum level would be set for these categories. The directors also urge the Government to maintain a firm grip on spending. It should resist the wage claims being made by some sectors of the public service because such increases "are inconsistent with the continuation of the impressive employment and economic gains of recent years", it warns. A sizeable surplus of revenue over spending should be built up on the public finances, it says, to allow room for manoeuvre inside monetary union. The Government is faced with new policy challenges because of the advanced stage of the economy's business cycle, "reflected in the emergence of signs of overheating, as well as a sharp rise in asset prices and increased wage pressure in the public sector". These are compounded by the comparatively competitive exchange rate the country will enjoy on entering EMU and further interest rate reductions.
"Directors considered the main policy requirements to be, first, a tightening of fiscal policy to offset the stimulus to demand from the easing of monetary conditions and second, continued emphasis on structural reforms in order to alleviate labour and other supply constraints," the report states. In view of the monetary constraints of EMU, fiscal flexibility will have to be maintained through continued Budget surpluses.
The directors also warn of the long-term pressure on public finances as the population ages "and the unfunded contingent liabilities of the current pay-as-you-go public pension system", noting that fiscal surpluses over the medium term could be used to address these. They say there is room for improvement in the compilation of statistics, particularly those covering wage trends and capital account transactions. The IMF report was welcomed by the Minister for Finance, Mr McCreevy, who on Wednesday had rejected the EU Commission's forecasts as overly optimistic. The European Commission refused to comment yesterday on the rejection of its buoyant growth figures for the Irish economy by Mr McCreevy, and economic commentators. A spokesman for Mr Yves-Thibault de Silguy, EU finance commissioner, said that he had said what he had to say. "He does not want to drag on a debate about the subject," the spokesman, Mr Patrick Child, said. Mr McCreevy said that the international climate would result in more moderate economic growth than the 8.2 per cent GDP growth for 1999 and 9 per cent for 2000 forecast by the EU.
Economists' views differed. Mr Dan McLaughlin, chief economist at ABN-Amro Stockbrokers, said the 11.4 per cent figure slightly understated economic growth for 1998. Mr Jim Power, chief economist at Bank of Ireland, said the forecast was "way too optimistic". "I believe that the economy is at the beginnings of a soft landing," he said.
