IMF urges Noonan to continue plan for €2bn adjustment

Minister for Finance Michael Noonan should continue with plans for a €2 billion budget adjustment next year, despit a "broadening" of the economic recovery, the International Monetary Fund (IMF) has said.

In a conference call today, the IMF’s mission chief for Ireland, Craig Beaumont, said it believed Ireland should stick to its annual deficit reduction targets irrespective as to whether economic growth came in ahead or behind expectations.

This would mean continuing with the €2 billion adjustment, irrespective of whether tax receipts proved stronger than expected. Any additional revenue, he said, could be used as a “buffer”, he said.

Ireland’s economic recovery was “broadening” but the continued need for further measures to get the budget deficit on target by 2018 will create political challenges, fund said in a report published today.

In its first post-bailout report on the Irish economy, it notes that the fall in support for the governing parties in the elections was widely seen as reflecting the cuts in expenditure and increases in taxation of recent years “together with the limited benefits, as yet, for the majority of the population of the emerging recovery”.

But it expresses confidence that the Joan Burton, whom it sees as the likely new leader of the Labour Party will not disrupt Ireland's pursuit of 2015 fiscal targets.

The “leading candidate” for the position of leader of the Labour Party “has indicated her intention that her intention is to remain in the coalition and to maintain the fiscal targets for 2015, “while also emphasising the need for social repair alongside economic repair”.

The authors of the report did not speak with Ms Burton or Alex White, who is also contesting the leadership of the Labour Party.

The report supports the Government’s objective of achieving a structural balance in the public finances by 2018 and says this will require measures equal to 4.5 per cent of Gross Domestic Product in the period to 2018.

This breaks down into measures equal to 1.75 per cent of GDP next year, followed by consolidation measures equal to a further 2.75 per cent of GDP in the 2016 to 2018 period.

The report says that in order to achieve the consolidation targets for the 2016 to 2018 period, “new discretionary measures will need to be a major contributor to adjustment in addition to continued restraint of welfare and pay rates.”

However if medium-term economic prospects turn out to be weaker than are now envisaged, the IMF team believes it would be appropriate to seek to achieve the deficit target over a longer period, rather than initiate additional consolidation measures.

The report is the first of the post-programme monitoring reports from the IMF, with the European arm of the Troika due to issue a similar report in the coming days.

When mapping out the risks to Ireland achieving its growth and debt-ratio targets, the report includes political risk. “As Ireland has endured substantial fiscal adjustment in the past seven years, the political difficulty of further fiscal consolidation to balance the budget is also a potential source of risk, requiring further steadfast commitment to Ireland’s medium-term fiscal framework.”

The report notes the way health spending has continued to create difficulties, and says reform is needed in the sector. It says the resolution of the mortgage distress issue remains an outstanding challenge that requires “intensive effort”.

Improvement in the intensity of the engagement with the long-term unemployed is also needed, according to the report. It also warns that the newly-established Ireland Strategic Investment Fund entails major operational challenges. The fund involves the redeployment of €6.8 billion, or approximately 4 per cent of GDP, towards supporting economic activity. It is imperative that the investment does not displace private projects as it would not be creating additional employment and economic growth. The continued need for the fund should be periodically reviewed.