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IMF Praises Ireland's Fiscal Policy

by Mike Godfrey,, Washington

28 June 2010

In a review of the Irish economy, the International Monetary Fund (IMF) concluded that Ireland had taken "assertive steps to deal with the most potent sources of vulnerability" and its fiscal consolidation was "staying on the path."

The IMF stated that the Irish government had moved early to establish a balanced consolidation plan and had stayed on course. As the fiscal situation deteriorated, the government had "acted repeatedly to take measures and raise the ambition of their fiscal consolidation goals."

This was achieved in a remarkably socially-cohesive manner, according to the IMF, and represented a balance of economic and social considerations. With their 2010 budget, the government had adhered to the consolidation track leading towards reducing the budget deficit to below 3% in 2014.

The IMF thought that substantial challenges remained. Following the already sizeable consolidation in 2009 and 2010, further consolidation measures, although not as large as that already achieved, of at least 4.5% of gross domestic product (GDP) were required to reach the 2014 target, said the IMF.

If GDP growth outcomes were weaker than those currently foreseen by the government, which the IMF considered a clear possibility within the current range of scenarios, the additional effort needed may even be greater.

The IMF considered that staying on target was critical to retain hard-earned credibility, but the risk of “consolidation fatigue” and, hence, a fraying of the necessary social cohesion could not be ruled out. For this reason, the Fund recommended that the Irish government specify further proposed measures as necessary.

Sustainable expenditure savings, coupled with a broadening of the tax base for revenue enhancement would also be necessary, said the IMF.

The IMF wanted to see an institutional process established to reinforce the collective commitment to stable public finances. The government had indicated the possibility of further developments in the move to a medium-term budget framework. This framework would provide the structure to reduce the uncertainties associated with the consolidation process; in good times ahead, it would constrain excesses, according to the IMF.

The IMF recommended that serious consideration be given to adopting a fiscal rule that creates a public metric for sound public finances and a fiscal council to advise on risks underlying public finances. Such mechanisms, despite their known limitations, would enhance policy credibility now and in the future, said the IMF.

TAGS: tax | economics | Ireland | fiscal policy | budget | International Monetary Fund (IMF)

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