Ireland: Staff Concluding Statement for the 2023 Article IV Consultation Mission
IMF News, November 3, 2023
Source details
- Canonical URL
- Ireland: Staff Concluding Statement for the 2023 Article IV Consultation Mission
Other formats
Bibliographic details
- Published: November 3, 2023
Outlook and risks
- Ireland’s economy showed remarkable resilience to recent consecutive shocks and achieved one of the highest growth rates in the euro area in 2021-22.
- Growth projections:
- Staff projects real GNI* growth to moderate to 2½ percent in 2023-24.
- GDP growth is projected to decelerate to 1½ percent in 2023 and 2⅔ percent in 2024, from an average of 12 percent during 2021-22.
- Inflation projections:
- Inflation is expected to average 5⅓ percent in 2023 and 3.2 in 2024 before converging to 2 percent in late 2025, reflecting ECB monetary tightening and moderation of growth and labor market tightness.
- Key downside risks:
- Further weakening of external demand.
- A renewed surge in commodity prices.
- An intensification of Russia’s war in Ukraine or the Israel-Gaza conflict.
- Tighter-than-expected global financial conditions.
- Deepening geoeconomic fragmentation and changes in international taxation.
- Volatility in activities of multinational enterprises (MNEs), where retrenchment (expansion) would lead to lower (higher) employment growth, tax receipts, and confidence.
Fiscal policy
- Primary objectives and rationale:
- Continue to support disinflation and avoid adding to aggregate demand.
- Build buffers for future shocks and spending pressures from aging and climate change.
- Avoid using excess corporate income tax (CIT) collections to fund permanent spending due to the uncertain and volatile nature of CIT revenues.
- Assessment of Budget 2024:
- The 2024 budget entails a slightly expansionary stance.
- Budget 2024 responded to elevated inflation through a package of permanent and one-off cost of living measures.
- A smaller and better targeted package would have been less costly while still protecting the most vulnerable.
- As inflation recedes, one-off cost of living measures should be phased out.
- In event of downside risks, automatic stabilizers should be allowed to work fully; any additional discretionary support should be temporary and targeted to the most vulnerable while preserving price signals.
- Any fiscal overperformance should be saved.
- Public investment and revenue base:
- Strengthening public investment efficiency and ensuring timely execution of the capital budget is critical to deliver on the National Development Plan while ensuring value for money.
- Efforts needed to expedite planning permission processes, modernize regulations, and streamline judicial review to reduce uncertainty for projects.
- Broadening the revenue base should remain a key objective: scope to expand and diversify tax revenues, including improving the personal income tax (PIT) system, reducing its administrative cost, and simplifying the VAT system.
- Savings fund policy:
- Staff supports the authorities’ decision to save part of excess CIT revenues in two savings funds to de-risk public finances and pre-finance future spending needs.
- Funds should operate within a strong fiscal policy framework; with EU fiscal rules unlikely to be binding for Ireland, authorities should reflect on an appropriate anchor beyond the current spending rule for 2022-26 and integrate the new savings funds within that framework.
- General principles following international best practices should be considered to ensure funds are appropriately structured and sufficiently large.
Financial and macroprudential policies
- Systemic risks and resilience:
- Systemic financial risks have increased, with key contributors including tighter financial conditions, persistent inflation, and rising vulnerabilities in the commercial real estate market (CRE) and its linkages with leveraged non-banks.
- Mitigating factors: households have remained resilient to higher interest rates and cost-of-living pressures; insolvency rates of domestic firms have increased only modestly.
- Residential housing markets remain vulnerable to further interest rate increases, though long-standing supply-demand mismatch may mitigate impact.
- Banking sector developments:
- Ireland’s banking ecosystem is in transition with a growing presence of international banks.
- Domestic banks have strengthened balance sheets with sound capital and liquidity indicators.
- Intensified supervision of credit and liquidity risks is recommended given possible delayed impacts from high inflation, tighter financial conditions, and vulnerabilities accumulated during a decade of low interest rates.
- Progress in reducing the government’s shareholding in domestic banks is welcome.
- Domestic banks need to retain talent and ensure a level-playing field versus nimble non-banks, as recommended in the 2022 FSAP.
- Large international banks’ reliance on wholesale funding, off-balance sheet liabilities, and inter-linkages with foreign non-banks warrant continued close monitoring.
- Macroprudential stance and mortgage measures:
- Staff encourages continued close monitoring of credit conditions and financial stability risks to assess need for future adjustments of macroprudential policy settings.
- Agrees that mortgage measures should not be used to address broader housing affordability issues.
- The Central Bank of Ireland’s gradual increase of the counter-cyclical capital buffer to 1.5 percent is welcome.
- Despite a slight increase in loan-to-income (LTI) for first-time buyers (FTBs), the limit remains restrictive and would unlikely lead to irresponsible borrowing.
- The relaxation of the loan-to-value limit for second and subsequent buyers is not advisable because they are riskier than FTBs; such loosening could be counterproductive if it increases housing demand and prices.
- The CBI should carefully monitor impacts of measure changes to ensure sustainable lending standards in the mortgage market.
- Market-based finance (MBF) and non-bank macroprudential framework:
- Links between the MBF sector and the Irish economy have been growing and need close monitoring.
- Continued work needed to fully elucidate interlinkages between parts of the MBF sector, the rest of the financial system, and the domestic economy.
- Closing significant data gaps in the “other financial institutions residual” sector and conducting granular risk analysis remain priorities, requiring intensified international collaboration.
- Data gaps in direct cross-border exposures to CRE prevent complete accounting of potential financial stability risks.
- Ireland is at the forefront of developing and operationalizing a macroprudential framework for non-banks: welcome introduction of a leverage limit and liquidity management guidance on property funds in November 2022 and a Discussion Paper on macroprudential policy for investment funds.
- Authorities should continue to monitor CRE and property funds and recalibrate macroprudential measures as needed, and work with regional and international institutions to develop targeted tools for non-bank risks.
- Ongoing extensive review of the funds sector should consider financial resilience and sustainability of the industry in Ireland.
- Anti-money laundering:
- Improved understanding of cross-border money laundering risks is important to guide national policy priorities.
- Increases in supervisory resources and efforts to develop a quantitative risk assessment framework are welcome.
- Authorities should consider exploring potential impacts of money laundering events on financial sector stability.
Structural policies
- Housing:
- Policies to increase housing density, remove rent caps, and improve productivity in the construction sector are crucial to sustainably boost housing supply and support sustainable growth.
- Measures under Housing for All need to be complemented by broader supply-side policies that increase urban density, improve land use, and enhance construction productivity.
- Provide greater certainty to developers by improving transparency and certainty about approval processes and accelerating them.
- Reduce complexity and restrictiveness of rent legislations, notably replacing rent caps with more targeted housing support for poor households, to increase rental housing supply.
- Increased housing supply would help relieve labor shortages and facilitate labor mobility, supporting long-term growth.
- Strengthening MNE inward linkages:
- Scope exists to further MNE sector inward linkages via supply-chain linkages, labor mobility, and innovation cooperation to raise SME productivity.
- Support digital transformation of SMEs, expand government support for SME-driven R&D, and provide infrastructure to foster industrial clusters to bridge productivity gaps.
- Climate policy:
- Progress in achieving key climate commitments needs to speed up.
- The government adopted ambitious emission reduction targets for 2030 and 2050, but Ireland will likely fall short of the 2030 target.
- Introduction of sectoral limits was welcome, but compliance is challenging and almost all sectors are projected to exceed their emission ceilings.
- Authorities have legislated an annual increase in carbon tax to 2030, with revenues committed to be fully recycled to address the cost of climate change.
- Additional policies needed to deliver faster emission reductions across all sectors.
- Options ahead of the Fit-for-55 package rollout in 2027–28 could include reduction/removal of implicit fossil fuel subsidies, expansion of the national carbon tax to sectors currently not covered by a form of carbon pricing (e.g., agriculture), higher and unified carbon taxation, and introduction of sectoral feebates.
- Vulnerable households should be protected using part of revenues from carbon taxation.
Mission closing
- The mission thanks the Irish authorities and stakeholders for hospitality, productive collaboration, and candid discussions, and expresses special gratitude to the Department of Finance and the Central Bank of Ireland for assistance with meetings and logistical arrangements.
International Monetary Fund