Ireland: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, May 10, 2019
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- Published: May 10, 2019
Overview and key findings
- The Irish economy is described as “one of the most dynamic in Europe” a decade after the global financial crisis, with strong economic growth, unemployment nearing historical lows, and improved public finances.
- Multinational enterprises play an important role in Ireland’s success; investment funds and other financial intermediaries have grown rapidly, lifting the overall size of Ireland’s financial sector above its pre-crisis level.
- The baseline outlook foresees continued robust growth and job creation with further tightening of capacity constraints.
- External risks are increasing due to close ties with the U.K. (Brexit), potential escalation in global protectionism, and changes in international corporate taxation.
- Policy priority: build buffers and strengthen resilience to alleviate demand pressures and prepare for the possibility of a major external shock.
Strengthening fiscal resilience
- Fiscal vulnerabilities and context:
- Budget 2019 aims to maintain fiscal balance, relying in part on buoyant corporate income tax (CIT) revenue.
- CIT accounts for nearly a fifth of total tax revenue, up from 7 percent in 2014.
- CIT revenue concentration is high, has weak links to the domestic economy, and is susceptible to international tax changes.
- Public debt remains high compared to European Union (EU) peers.
- Recommended fiscal stance:
- Pursue a small budget surplus in 2019 (assuming an orderly Brexit) by adhering to budgeted expenditure ceilings and saving unforeseen additional CIT revenue (either in the Rainy-Day Fund or to pay down debt).
- For 2020, target a surplus of 0.5 percent of GDP.
- Aim to reduce the public debt ratio below 50 percent over the medium term.
- Specific policy options to achieve objectives:
- Broadening the tax base in a growth-friendly manner:
- Increase in the VAT rate for the hospitality sector is welcomed; scope exists to streamline Ireland’s five-rate VAT system.
- The Universal Social Charge (USC) largely duplicates Income Tax; consider folding USC into a reformed Income Tax with somewhat higher rates, broader base, and more tax bands while preserving overall yield and redistribution features.
- Improve implementation of the local property tax by adhering to three-yearly valuation assessments, maintaining the tax rate, and capping the rate of annual tax base increases.
- Moderate expenditure growth and increase efficiency:
- Resist spending pressures and avoid using temporary revenue gains to fund permanent measures.
- Conduct a thorough healthcare review to halt continuous spending overruns.
- Improve planning, selecting, costing, and ex-post assessment of infrastructure investments, including public-private partnerships.
- Use windfalls for debt reduction:
- Use proceeds from the National Asset Management Agency and sales of government stakes in the banking sector for debt reduction to reverse the large increase in public debt during the crisis.
- Continue proactive engagement on international corporate tax reform:
- Implement agreed reforms, including the EU Anti-Tax Avoidance Directives, and engage in multilateral efforts to address digitalization and tax avoidance.
- Social Insurance Fund (SIF) sustainability:
- Population ageing expected to increase pensions and social expenditures; SIF faces significant deficits starting in 2030.
- Conduct a review of social security contributions and benefits; planned increases in the state pension age are endorsed.
- Climate policy:
- Rising greenhouse gas emissions move Ireland away from climate commitments.
- Urgent need for a comprehensive strategy to decarbonize agriculture, transport, and housing; include increasing the carbon tax.
Safeguarding financial sector stability
- Domestic banks:
- Resilience has improved; stress tests suggest banks could withstand sizeable shocks.
- Nonperforming loans (NPLs) are declining but remain high and weigh on profitability.
- Profitability pressures from low-rate tracker mortgages, regulatory requirements to build loss-absorbing liabilities, and elevated operational costs.
- Recommended actions:
- Intensify borrower-creditor engagement, accelerate legal proceedings, strengthen supervisory guidelines on provisioning and NPL write-offs, and avoid legislation discouraging NPL portfolio sales.
- Improve cost-efficiency and diversify lending.
- Non-bank financial sector:
- Large and fast-growing sector (investment funds, money market funds, other intermediaries) receives most funding from abroad and invests mainly in foreign assets.
- Sector is mainly a conduit of global shocks but links to the domestic economy are non-trivial and growing; vulnerabilities are emerging though current risk of distress appears low.
- Recommended actions:
- Continue close monitoring of risks, including leverage by investment funds.
- Improve data collection and intensive international cooperation.
- Develop capacity for system-wide stress testing.
- Macroprudential policy:
- Current limits on loan-to-value and loan-to-income ratios are appropriately calibrated and have become more binding.
- Authorities should introduce debt-based measures (e.g., limits on debt-to-income and debt service-to-income ratios).
- The countercyclical capital buffer increase to 1 percent (announced last year) will come into effect in July.
- Consider expanding the toolkit with a systemic risk capital buffer given openness and external vulnerability.
- Brexit preparedness for financial sector:
- Preparations appear broadly adequate to mitigate major disruptions; continue close cooperation with the EU and U.K. to ensure business continuity and avoid cliff-edge risks.
- Financial institutions should remain conservative in risk assessments; the central bank should allocate adequate resources for high-quality authorization processes for U.K.-based firms migrating activities to Ireland.
- Anti-money laundering:
- Transposition of the 4th EU Anti-Money Laundering Directive into national law is welcome, including legal basis for a central registry of beneficial ownership and enhanced due diligence for politically exposed persons.
- Ensure ongoing implementation of customer due diligence; transparency of beneficial ownership; suspicious transaction reporting by banks, real estate sector, lawyers, and trust and company service providers.
Addressing bottlenecks to growth
- Housing:
- Housing prices continue to rise but at a more moderate pace as supply begins to respond; rental market supply shortages have pushed rents well above pre-crisis levels.
- Government measures include establishing a state lender for financially constrained developers and steps to expand social housing.
- Recommended actions:
- Improve spatial planning to support building where demand is strong.
- Rationalize building regulations and improve tax measure efficiency to counter land hoarding in urban growth areas.
- Target affordability measures to low-income households and the homeless to avoid exacerbating price pressures.
- Productivity and sectoral performance:
- Overall productivity is high; multinational sector is highly productive; small- and medium-sized enterprises are more productive on average than in the rest of Europe.
- Productivity declining in transportation, accommodation, food services, and agriculture—sectors most exposed to Brexit.
- Recommended actions:
- Improve enabling environment via direct funding of research and development, worker training, and quality infrastructure investment.
- Equip workers with skills for finance, professional services, and information and communication technology.
- Gender gap and labor force potential:
- Female labor force participation is increasing but lags the EU average; high childcare costs are a major obstacle, especially for low-income families.
- The Affordable Childcare Scheme is welcomed.
- Additional policy options:
- Promote flexible work schedules, equal employment opportunities, individualize income tax, and increase transparency of gender pay differentials at the company level.
Disorderly no-deal Brexit contingency
- A disorderly no-deal Brexit would have significant and immediate adverse consequences and reduce long-run output.
- Recommended policy responses in such a scenario:
- Allow automatic fiscal stabilizers to operate.
- Provide targeted, temporary, and effective support to help hard-hit sectors adjust.
- Prepare for a fiscal stimulus and deploy the Rainy-Day Fund depending on the severity of the downturn.
- The central bank should release the countercyclical capital buffer in case of a sharp contraction in bank credit.
Source: Ireland: Staff Concluding Statement of the 2019 Article IV Mission, May 10, 2019.