IMF seeks healthcare review to avoid spending overruns

A thorough healthcare spending review is needed to halt continuous cost overruns by the State, the International Monetary Fund (IMF) said, warning the current situation undermines the integrity of public finances.

In a statement following an official visit, the body said that it was “crucial” to avoid the use of temporary revenue gains to fund permanent measures.

The IMF also suggested new measures to limit consumer borrowing. It called for the introduction of debt-based measures, which would assess a borrower’s repayment capability across all loans.

The Central Bank noted that this would be “premature” in the absence of an established Central Credit Register.

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In the meantime, lenders must nevertheless seek to inform themselves about total borrower indebtedness and limit their lending per their requirements under the 2012 Consumer Protection Code, the bank said.

It was the Republic’s corporate tax take that garnered the most attention from the IMF, given that it accounts for almost a fifth of total tax revenue, up from 7 per cent in 2014.

The watchdog flagged that “most” of the additional corporate tax revenue was used to fund spending overruns in healthcare and offset income tax reductions. What is of concern to the fund is that part of corporate tax income is at risk “due to its high concentration, weak links to the domestic economy and susceptibility to changes in the international tax landscape”.

Praise

The IMF’s staff concluding statement after its 2019 mission addresses a range of issues within the economy but it also praised the Republic for having an economy which is “one of the most dynamic in Europe”.

“Economic growth is strong, unemployment is nearing historical lows, and public finances have improved. Ireland’s success story is broad-based with multinational enterprises playing an important role,” the fund said.

Nevertheless, concerns about taxation were prominent in this statement, particularly in relation to tax paid by companies.

"To safeguard its reputation, Ireland should engage constructively in multilateral efforts to address digitalisation and tax avoidance.

“With a more level international taxation playing field, the impact on the economy of such measures would be mitigated by the country’s various other competitive advantages such as its welcoming business environment and qualified labour force,” the IMF said.

Housing sector

The fund called for the Government to target a budget surplus of 0.5 per cent of gross domestic product (GDP) in 2020, while aiming to reduce the public debt ratio below 50 per cent over the “medium term”.

Addressing issues in the housing sector, including rising rents, homelessness and the mortgage market, were among its recommendations.

It argued that tax measures could be improved to counter land hoarding in urban areas and said that measures to improve affordability should be targeted to low-income households and the homeless to “avoid exacerbating housing price pressures”.

Additionally, it backed Paschal Donohoe's plan to reduce national debt from proceeds from the National Asset Management Agency (Nama), arguing that a reversal of the large increase in public debt during the banking crisis was important.

One of its concerns for the local economy was vulnerabilities emerging in the non-bank financial sector, which requires “close surveillance”. And although the risk of financial distress currently appears low, it said improving data collection and continuing international co-operation is important to protect against shocks.

Carbon tax

A measures that could prove less popular is the IMF’s suggestion to increase the carbon tax, charged on fuel. “Ireland should step up policy efforts to achieve its climate targets. Rising greenhouse gas emissions bring Ireland further away from its climate commitments,” the IMF said.

“There is an urgent need to develop and implement a comprehensive and appropriately ambitious strategy to transform the carbon-based economic model, particularly through decarbonising agriculture, transport, and housing.”

In its outlook, the fund said it foresees continued “robust growth” but warned of external risk including Brexit and global protectionism. “Policymakers should manage these risks by focusing on building buffers and strengthening resilience of the economy, both to alleviate demand pressures and prepare for the possibility of a major external shock,” it said.