The Irish economy has become "increasingly imbalanced" because of a heavy reliance on the property sector and rapid rises in personal debt, and the Government needs to prepare for the possibility of a fall in tax revenue, the International Monetary Fund (IMF) has warned.
In its annual review of the economy, the IMF said Ireland's economic performance remains strong and it praises the economy for having one of the highest rates of growth among industrial countries, one of the lowest unemployment rates and an inflation rate that is falling towards the euro zone average.
It forecasts real gross national product (GNP) growth of 6.2 per cent in 2006, which exceeds the Central Bank's prediction of about 5 per cent growth in GNP this year.
However, it cautions against a giveaway budget in December, advocating that any windfall revenues from better-than-expected Exchequer figures should be saved. It says "modest fiscal tightening" is needed in 2007, as a larger cushion is needed because of the risk of a sharp fall in tax revenue.
Its report said this tightening was in contrast to the substantial loosening implicit in the projections of the Irish authorities it consulted for the review.
The IMF assessment is the result of a consultation by its staff in May with Minister for Finance Brian Cowen; the governor of the Central Bank, John Hurley; the chief executive of the Irish Financial Services Regulatory Authority, Patrick Neary; and other senior Government officials, representatives from business organisations, financial institutions and economic research bodies.
According to the report, some of those consulted argued that a continued high level of Government investment was appropriate for now and that it would be important to further improve public services, especially in light of intense pressures in the run-up to the general election.
The IMF also called for mortgage interest tax relief to be reduced. Remaining property-based incentive schemes should be phased out and a new property tax introduced to ensure a "soft landing" in the property market, which it said was overvalued.
Economic activity has become heavily dependent on the building sector, with sharp increases in house prices and rapid credit growth.
An "abrupt correction" to the property market cannot be ruled out, it says, although the contraction of the construction sector is likely to be smooth.
The IMF's warning was endorsed last night by Fine Gael finance spokesman Richard Bruton, who said the last thing the country needed was a reckless pre-election budget. He said it confirmed warnings by his party and the ESRI.
"It is an economy that has been growing strongly for the past 10 to 12 years but now faces fragility in terms of rising costs and falling competitiveness and an over-dependence on one or two sectors . . . The last thing the economy needs now is another reckless budget before an election designed to secure the political future of the Government rather than the future security of the economy," he said.
By contrast, Tánaiste Mary Harney described the report as a positive assessment of the economy's performance and prospects. She said the IMF had acknowledged that Ireland's "robust performance has been supported by sound economic policies, including prudent fiscal policy, low taxes on labour and business income, and labour market flexibility".
The IMF says economic competitiveness has eroded, reflecting a combination of faster wage growth in Ireland compared to its trading partners, declining growth in productivity and the appreciation of the euro against the dollar.
Continued wage moderation and a flexible labour market are essential, according to the report.
