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Ireland's Fiscal Consolidation On Track

by Jason Gorringe,, London

15 July 2010

In an Article IV Consultation with Ireland the International Monetary Fund (IMF) concluded that the government had stayed on course towards its consolidation goals, but much remained to be done. However, in a tense market environment for sovereign debt, the country should be prepared with additional measures to meet its targets in case of unexpected fiscal demands.

Taking into account the recommendations of the tax commission and consistent with IMF advice, the government is currently developing proposals to reform income taxation, aiming to simplify and broaden the income tax base. The reform would include eliminating tax exemptions, reviewing the income tax bands, consolidating the current levies and introducing a universal social charge, said the IMF.

The government also concurred with the IMF view that property taxation would help broaden the tax base while at the same time making it more stable than under the current system of stamp duties. In the transition to a valuation-based tax, a flat tax rate was under consideration, according to the IMF.

In principle, the government agreed with the IMF that institutionalizing the commitment to fiscal goals could prove valuable, and consideration was being given to bolstering the institutional arrangements. A fiscal rule, consistent with the Stability and Growth Pact, would create a public metric for sound public finances and a technocratic fiscal council could advise on risks underlying public finances, according to the IMF.

After a fiscal adjustment of 5.5% of GDP, the IMF expected the Irish structural deficit to decline to 8.5% of GDP in 2010.

The IMF believed the 2010 budget adhered to the consolidation track, but risks remained. The IMF projected a 2010 deficit of 11.9% of GDP compared to the government's projection of 11.5%, because of lower nominal 2009 GDP than assumed in the 2010 budget and a weaker growth projection.

The annual financing needs in 2011–12 are projected at about the 2010 level. The IMF said that sizeable cash balances financed by short-term debt could act as a buffer against any temporary difficulties in issuing long-term debt.

The IMF supported the appropriately ambitious fiscal consolidation plan through 2014 but cautioned that the required adjustment may be larger than projected. The IMF said the consolidation plan, outlined in the December 2009 Stability Programme Update, aimed to reduce the deficit to below 3% of GDP by 2014. The plan envisaged fiscal adjustment of 4.5% of GDP over 2011–14, of which about 1% of GDP represented reductions in capital expenditures.

Starting from a higher projected deficit in 2010, the IMF estimated that the adjustment need over 2011–14 could be 6.5% of GDP, 2% higher than the government's projection.

The IMF noted the government's proposal that expenditure savings would remain central to achieving the consolidation targets. The recent expenditure commission identified detailed potential reductions yielding savings of EUR5.3bn (3.5% of GDP), of which about EUR2bn had been implemented in the 2010 budget.

TAGS: tax | economics | Ireland | property tax | fiscal policy | budget | International Monetary Fund (IMF) | stamp duty | individual income tax

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