The International Monetary Fund (IMF) remains broadly upbeat about the Irish economy, despite the giveaway Budget of last year and the growing economic slowdown.
Its latest Article IV report on the Republic, which will be published by the end of the month, is understood to broadly support the Government's tax and spending policies. However, the report will call also for a number of changes, such as increasing the scope of VAT and providing additional incentives to work, which are likely to be difficult for the Minister for Finance, Mr McCreevy, to achieve.
Certainly the Washington-based institution's assessment of the economy is far more nuanced than that of the European Commission. Its broad view is that spending should now be capped and tax relief carefully targeted.
Last year the IMF called for a similar policy while stressing the concerns about overheating within the economy. At that time it called for tighter tax and spending policy to help moderate inflation. That of course did not happen, with the equivalent of more than £2 billion (#2.54 billion) in tax cuts and additional spending poured into the economy in the meantime.
Nevertheless there has been a slowing of the economy since then, which the IMF now sees as reducing the risks from this stimulus.
The question now is what policies are best to ensure a sustainable rate of growth. It is believed that the IMF will conclude that the best combination includes spending control, limited tax cuts, a so-called neutral budget and reform of wage bargaining.
It is best - in the IMF's view - to aim for a neutral stance. In other words, large Exchequer surpluses are no longer necessary. But any tax cuts or spending increases in next December's Budget should be offset by other counter-measures. Importantly - contrary to the demand of the European Commission - the IMF is understood to believe that there is no need for an adjustment this year, which has been ruled out by the Minister for Finance in any case.
Indeed the IMF is of the view that the Government's reform of the tax system is "commendable" and it sees scope for further rationalisation.
In this regard, it is believed to be pointing towards a possible increase in the range of goods covered by VAT. However, this is likely to be politically difficult for the Minister for Finance to achieve in advance of a general election.
A parallel suggestion of reforming the PRSI system may be more likely.
In a move that would boost income inequality across the State, the IMF has concluded that to increase employment, the effect of future tax changes should be to improve the remuneration derived from working compared with non-participation or unemployment.
In the wake of the recent report from the Economic & Social Research Institute into growing inequality across the State, that is likely to cause some controversy.
In general terms, the IMF appears to be adopting a far more nuanced view than the European Commission, which has been calling for continuing Exchequer surpluses, irrespective of the economic slowdown.
A Commission team is expected in Dublin again in September and the Minister for Finance has been keen to get his hands on the IMF report in advance of this.
The Government's trump card, however, in its discussions with Europe could be the likely prospects of the Commission having to take action against Germany, Spain or Portugal, all of which are technically in breach of the so-called broad economic policy guidelines.
Only by proceeding with such a reprimand will the Commission negate the view that Ireland's treatment last year had at least something to do with disgruntlement on the part of fellow EU states with the Republic's highly competitive corporation tax rates.
On wages the IMF appears to have a similar view to the ESRI. Contrary to the employers' organisation IBEC, it is understood to believe that wages, which are increasing strongly this year, at around 11 per cent, are unlikely to jeopardise Irish competitiveness.
The logic of this argument is that even continued wage increases are simply a mechanism that allows Irish wages to catch up with European levels and that that in itself will bring growth back to a sustainable rate.
It is in the longer term that the IMF is believed to see the possibility that the adjustment could overshoot and wages shoot too high, particularly in the public sector.
The benchmarking system is seen as key to this, but the IMF is also concerned that the process could lead to large increases in public sector wages. Keeping the body free from political interference will be a key issue. Large increases in wages would need to be offset by other measures, although it is not clear what these could be.
Interestingly the IMF now appears to be of the view that the concept of wage restraint as a trade-off for tax cuts has run its course, although a broader dialogue on issues such as working conditions is still advocated.
