Ireland's fiscal consolidation plan through to 2014 is "appropriately ambitious" but the adjustment needed may be larger than the Government envisages, the International Monetary Fund (IMF) said today.
In an annual review of Ireland's economy, IMF staff said Ireland's budget deficit for 2014 will be 5.9 per cent of gross domestic product (GDP) versus the target agreed with the EU of a deficit smaller than 3 per cent of GDP.
"The staff's macroeconomic projections imply that the required medium-term adjustment could be larger than projected by the authorities," said an IMF staff paper published alongside the review.
"The authorities concurred with staff on the importance of meeting the targets they have set within the agreed timeframe," said the paper, which details discussions between the IMF and the Government.
The IMF urged the Government to introduce a medium-term budget framework, and recommended adopting a fiscal rule and a fiscal council to advise on risks to public finances. These would also enhance policy credibility, the IMF added.
The IMF said fiscal and banking measures adopted by the authorities have helped stabilise the economy but cautioned economic vulnerabilities are elevated. The world body said the economy will likely shrink by around 0.5 per cent in 2010, maintaining its forecast from June when an IMF mission visited Dublin.
"Growth prospects are weighed down by the ongoing correction of pre-crisis imbalances," the IMF said.
The IMF said there is a large agenda remaining to fix Ireland's banking sector. It urged the authorities to ensure an "orderly" disposal of property assets accumulated by the National Asset Management Agency. This would help restore the commercial property market, the IMF added.
"Rather than aiming to time the market for an upturn in property prices, the goal should be to reduce the large overhang of property in State hands, restart the market transactions and, thus, help normalise the property market," said an IMF staff paper published alongside the review.
The IMF urged early action to introduce a special bank resolution mechanism, to strengthen the stability framework.
Minister of Finance Brian Lenihan welcomed the report in particular, "the IMF staff's recognition of the credibility gained by the Irish authorities in both addressing the fiscal situation and stabilising the banking sector".
"I also acknowledge the importance of building on the progress made by our current fiscal consolidation. The Government is fully committed to meeting the targets set out in Budget 2010 for the reduction of the General Government Balance to below 3.0 per cent by 2014.
He added: "With regard to the IMF staff's proposal for further developing a medium term budgetary framework, as I stated recently, I am open to considering additional enhancements to the process of budget reform."
Mr Lenihan said the report "supports the actions of the Government and points to the challenges that continue to face us," he said.
Mr Lenihan said the IMF report showed the Government was following correct economic approach. He also welcomed the publication of the ESRI's Quarterly Economic Commentary, which he said also endorses the Government's budgetary strategy.
However, Fine Gael's Richard Bruton said the IMF forecast should be a wake-up call for the Government.
"The IMF has issued a very downbeat forecast about the outlook for Ireland’s economy, which raises the grim prospect of even greater spending cuts and tax increases," the party's enterprise spokesman warned.
"This report should serve as a wake-up call for the Government about the need for a far more visionary approach to growth and employment. The alternative is only more pain for Irish taxpayers."
Mr Bruton said it was regrettable the Government had not taken a more open mind to find new ways to return Ireland to growth.
Reuters