The International Monetary Fund (IMF) has urged the Government not to cut taxes in the upcoming budget, warning it risked "over-stimulating" Ireland's fast-growing economy.
In its regular report on Ireland, the Washington-based fund suggested “fiscal policy should be tightened to build buffers” against future shocks which loomed in the form of a hard Brexit and the possibility of greater trade protection internationally.
“Fiscal policy should be countercyclical, while making room for much-needed infrastructure investment,” it said.
IMF officials have been in Ireland for the past two weeks to assess the State’s economic performance and complete their latest report.
On housing, the fund said “some metrics” indicated prices here were “modestly overvalued” but it did not see this as a financial stability risk.
The IMF’s Erik de Vrijer said price-to-income ratios in the sector “were on the high side” and “affordability was being stretched”.
The fund recommended boosting housing supply through State-backed social housing projects while limiting to demand-side measures such as the Government’s Help-to-Buy scheme to low-income households.
It also said further efforts should focus on streamlining the planning process and reducing the skills gap in the construction sector.
Overall, the IMF concluded that Ireland’s growth prospects remained strong as robust domestic demand, together with the global recovery, continued to boost activity.
“As a result, the economy is rapidly approaching full employment, with the prospective rebound of the construction sector adding to pressures,” it said.
External risks included an escalation in global protectionism and a possible hard Brexit.
Brexit, it said, would have significant negative spillovers given Ireland’s strong trade, financial and labour market linkages with the UK.
It said considering the strong cyclical upswing and the risks to Ireland’s economic outlook, the Government should tighten its fiscal stance.
It recommended the Government pursues a small budget surplus in 2019, while aiming to reduce the public debt ratio to 50 per cent over the medium term.
To achieve this, it advised broadening the tax base. One way this could be done was by increasing the tax on diesel, which is currently subject to a lower rate of excise duty than petrol.
In addition, the IMF recommended getting rid of various tax exemptions and preferential rates such as the lower 9 per cent VAT rate for the hospitality sector.
The Government had considered removing this in the last budget, but was persuaded against such a move on account of the risk posed to the sector from Brexit.
The IMF also cautioned the Government against using temporary windfalls from multinationals to fund permanent measures. “Tax windfalls emanating from the activities of multinationals should be used to reduce public debt or to increase the forthcoming rainy day fund.”
The fund also highlighted the “significant progress” being made in reducing non-performing loans in the banking system, noting the sale of these loans to third-party funds, viewed as controversial in some quarters, was a necessary part of the financial ecosystem.
The IMF also suggested the resolution of problem loans could be sped up by accelerating the legal process and improving credit-borrower engagement.