IMF says deeper cuts not needed in budget

THE CHIEF economist at the International Monetary Fund has warned the Government not to make a budgetary adjustment above what…

THE CHIEF economist at the International Monetary Fund has warned the Government not to make a budgetary adjustment above what is needed to reach the 8.6 per cent target outlined in the agreement with the “troika”.

Speaking in Dublin yesterday, Olivier Blanchard said he thought it would be better to stick to targets set in the bailout as deeper cuts could affect Irish economic growth negatively.

“If there was a major credibility issue and something was needed as a new sign, then it would probably make sense to be tougher,” he said.

“It seems to me, given that the current path seems to be credible, that further fiscal consolidation would affect growth negatively. It may not be needed so, given what I know, I would stay with the programme.”

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Mr Blanchard said Ireland had “turned a corner” and even though the level of unemployment was too high and production was too low, he believed the State was moving in the right direction.

“It seems to me that export growth is for real,” he said. “If you look at what is behind it it’s not just an accident in one quarter or the other, but that basically the export sector is becoming competitive again, that it is fairly wide-based and not just one firm or industry.

“The adjustment in competitiveness is happening increasingly through productivity rather than wages, which is good. The fiscal adjustment is a tough one, obviously, but you are at pace, you are doing it.”

Mr Blanchard also said he believed Ireland should be in a position to resume borrowing on international debt markets late next year or early in 2013 with “relatively small spreads”.

“At that time Ireland may be seen as a good country, a country without great risk,” he added.

Asked about the developments in Brussels regarding the euro zone debt crisis, he said he did not wish to comment on any developments before the ink was dry.

Mr Blanchard was speaking during a visit to Trinity College Dublin where he was awarded honorary patronage of the University Philosophical Society for his contribution to economics.

In his address to students, Mr Blanchard said there had in the past been a consensus in the field of macroeconomics that needed to be rethought “very deeply”. He said it was no longer enough to assume that all would be well if inflation was kept at about 2 per cent and debt to GDP ratios remained at about 60 per cent.

Mr Blanchard said financial regulation was something those involved in macroeconomics did not think they needed to be concerned about in the past.

However, he said that making financial regulation less fragile had now become a priority and that keeping debt to GDP ratios at about 25 per cent would allow governments more room to manoeuvre in their fiscal policy in times of economic difficulty.

Steven Carroll

Steven Carroll

Steven Carroll is an Assistant News Editor with The Irish Times