The State’s deteriorating finances should stabilise in the medium term if the Government acts now to control spending and the economy grows at its expected rate, the IMF said today.
In its latest report on Ireland, the IMF noted the recent weakening of Ireland’s financial position. It said the Government’s finances will weaken sharply between 2002 and 2004 due to falling tax revenue and increased spending.
However, the improved economic outlook for the world economy and more controlled spending should see a gradual improvement in the finances, it said.
The Minister for Finance, Mr McCreevy said he welcomed the IMF’s findings. "I agree with the Board’s view that the economic outlook is broadly favourable though, of course, much depends on a global recovery.
"I also agree that we now face a number of challenges which must be addressed if we are to maintain our competitiveness," Mr McCreevy said.
The IMF said Ireland’s debt level is currently low by international standards and favourable demographics should shield the economy from the worst effects of the "pension time bomb" which is primed to hit other countries.
Tax revenue should recuperate as the economy bounces back from the short recession and the cost of recent tax cuts washes out of the system, according to the IMF. The phasing in of earlier payments of corporation tax will yield a temporary but prolonged boost to tax revenues from 2002 to 2006, the IMF added.
However, built into this forecast is the optimistic assumption that the huge spending programmes to which the Government is committed to such as health and the National Development Plan will not run over budget.
The National Health Strategy is expected to cost €12.7 billion from 2003 to 2011, but this figure could rise depending on the cost of borrowing over the period.
Moreover if economic growth falls short of forecasts, considerable deficits are likely in the future.
Employers’ association IBEC said the IMF report confirms the concerns it has raised at the state of the public finances.
According to Mr Aebhric McGibney, IBEC’s senior economist, the rate of growth of current spending must be brought into line with the nominal growth rate of the economy in order to provide funds to tackle the infrastructure deficit.
IBEC concurs with the IMF recommendation that a target of a structural fiscal balance should be set over the medium term, rather than the current Government target of a deficit of minus 1 per cent.
"These budget numbers do not even reveal the true extent of the deterioration, as they do not take account of departmental overspending during the course of the year," said Mr Mc Gibney added.
The IMF report also warned that Ireland’s competitive position has been steadily eroded by the strengthening euro and escalating domestic costs. The report noted the two-tiered structure of Irish industry, with the productivity gains achieved by foreign-owned companies disguising the poor performance of domestically owned firms.
The risk to competitiveness is most marked in the relative strength of the euro to sterling as Britain remains Ireland's most important trading partner.