IMF demanded hike in 12.5% tax in bailout talks

Brian Lenihan resisted pressure to raise Irish corporation tax rate in return for deal

Brian Lenihan “relieved” when he phoned to say government accepted bailout, says former Canadian finance minister, Jim Flaherty, in book of essays published tomorrow. Photograph: Brenda Fitzsimons/THE IRISH TIMES

Brian Lenihan “relieved” when he phoned to say government accepted bailout, says former Canadian finance minister, Jim Flaherty, in book of essays published tomorrow. Photograph: Brenda Fitzsimons/THE IRISH TIMES

 

The International Monetary Fund (IMF) demanded at one stage in the global financial crisis that Ireland should raise its 12.5 per cent corporation tax rate as part of any bailout deal, it has emerged.

The demand was successfully resisted by the then minister for finance Brian Lenihan, according to a book of essays in his memory, which will be published tomorrow.

The disclosure about the IMF demand is contained in a chapter written by the long- serving Canadian finance minister Jim Flaherty, who died earlier this year aged 64.

Mr Flaherty, who served as Canadian minister for finance from 2006 until earlier this year, recalled the banking crisis that developed in the autumn of 2008 and pointed out that Ireland forms part of the constituency led by Canada at the IMF and World Bank.

Bubble

“I discussed the bank situation and, of course, the housing bubble with Brian at the Fall IMF/ World Bank meetings in Washington in 2008 and at subsequent meetings. There was serious concern at the IMF that it was essential for Ireland to enter into a financial aid agreement with the IMF.

 

“Ireland resisted, knowing full well that many of the European governments that had accepted IMF ‘packages’ had been defeated in their next elections.

“At one point the IMF asked me to intervene as the leader of the Canadian constituency at the IMF to demand Ireland raise its corporate tax rate as a condition of receiving IMF aid.

“Brian dismissed the suggestion. I did not press the point, given not only that the lower corporate tax rate was a proven economic advantage for Ireland but also that the unemployment rate and public debt in Ireland were both rising dramatically. It was not the time to discourage investment in Ireland,” wrote Mr Flaherty.

He outlined how the decision of the government to introduced a blanket bank guarantee, covering bonds, senior debt and dated subordinated debt, in September, 2008, sent shockwaves far beyond Ireland.

Two years later, at the insistence of the European Central Bank, the government finally agreed to accept a bailout package backed by the IMF.

“At the end of many discussions, the government of Ireland chose to accept the IMF package of financial aid. I had encouraged Brian frequently to do so but, as an elected person, I knew also that the consequences at the polls would be dire. But these are the tests of character in a political life are they not?

Character

“If it is only about getting re- elected regardless of the public good, one will not run short of willing politicians. Brian Lenihan had character. He took the essential steps for his country’s economic recovery. He has been proven right.”

 

Mr Flaherty recalls that Mr Lenihan sounded relieved, and even a bit cheerful, when he phoned to say the government had decided to accept the bailout.

“Ah Jim, we weren’t rich all that long,” the Irish minister remarked.

“Brian, of course, was re- elected despite the government’s defeat. A testament to his enduring commitment to public service. He was a fine man and an excellent finance minister. I can honestly say that his leadership is greatly missed internationally.”