Ireland: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, April 4, 2025
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- Published: April 4, 2025
Outlook and risks
- Ireland entered 2025 in a strong position with growth projected to remain solid and inflation to stay close to target.
- Baseline projections (finalized before the U.S. trade policy announcement of April 2) indicate:
- Real GNI* to increase by 2.7 percent in 2025.
- Real GNI* expanded by about 4 percent in 2024 (estimated).
- Real GNI* to gradually converge to its potential of 2¼ percent over the medium term.
- Both headline and core inflation are expected to stay close to 2 percent under the baseline scenario.
- Major downside risks to the growth outlook:
- Concentration of activity in a small number of multinational enterprises (MNEs), increasing vulnerability to external trade and tax policy changes and firm- or sector-specific shocks.
- Reversal of globalization threatening the Irish economic model based on free trade and capital flows.
- Intensification of regional conflicts causing supply disruptions, refugee inflows, and commodity price volatility.
- Domestic capacity constraints delaying infrastructure and housing goals and raising costs.
- Risk of overheating if fiscal policy turns expansionary.
- Note: This concluding statement does not incorporate the impact of the U.S. trade policy announcement of April 2, which will be assessed in the Staff Report of the 2025 Article Consultation with Ireland expected to be published in June.
Fiscal policy — findings and recommendations
- Appropriate stance:
- A broadly neutral fiscal stance in 2025, with higher capital expenditure, is recommended given the economy is operating at full capacity and the ECB’s monetary policy easing.
- Priorities:
- Avoid adding to aggregate demand.
- Improve spending efficiency across key expenditure areas to reduce the likelihood of spending overruns and create room for capital expenditure.
- Save revenue overperformance.
- If downside risks materialize, Ireland has fiscal space to provide focused counter-cyclical support.
- Vulnerabilities and prudence:
- High exposure to external shocks and significant uncertainty regarding future streams of corporate income tax (CIT) revenue, which is highly concentrated.
- Future spending pressures from demographic changes, security, and the green and digital transitions may exceed current projections.
- Maintaining prudent fiscal policy is key to increasing economic resilience and building buffers for adverse scenarios.
- Use of specific receipts:
- Support for using receipts from the Court of Justice of the European Union (CJEU) ruling for increased capital investment in water, energy, housing and transport.
- Windfall CIT receipts should not be used to fund permanent spending.
- Public investment scaling-up:
- Should be within a proper overall spending envelope to ensure value for money.
- Capital outlays should be stepped up in a prioritized manner within the overall spending envelope.
- Rationalize current expenditure and improve spending efficiency to create space for public investment.
- Continue efforts to expedite the complex planning and judicial review process.
- Strengthening the national fiscal framework — recommendations:
- The EU fiscal framework is not binding for Ireland given the use of GDP denominators, nor is it sufficient to hedge against significant tax revenue uncertainty.
- Consider placing a credible national fiscal framework on a legislative basis to safeguard public finances and address strategic investment needs.
- Specific suggested components:
- Consider adopting a general government debt anchor, set at a level that ensures fiscal sustainability.
- Complement the debt anchor with an operational rule based on multi-year net expenditure ceilings, calibrated to keep general government debt close to the anchor while taking into account prevailing economic conditions. Expenditure ceilings should ideally cover all institutions under the general government classification and should be simple to implement and communicate.
- Include additional provisions for credibility, flexibility, and adaptability: an escape clause and triggering conditions, a correction mechanism specifying remedial actions for noncompliance, and periodic reviews to ensure calibration to macro-fiscal conditions.
- Integrate the two savings funds—Future Ireland Fund and Infrastructure, Climate and Nature Fund—into the enhanced fiscal framework.
- The Irish Fiscal Advisory Council should play a critical role in monitoring compliance with fiscal rules and enhancing credibility.
Financial sector policy — findings and recommendations
- Overall monitoring:
- Continued close monitoring of financial stability risks is warranted.
- Financial stability risks from the housing market remain limited.
- Healthy household and corporate balance sheets support resilience, but geoeconomic shifts may adversely affect MNEs with knock-on effects.
- Banks:
- Banks are well-capitalized and liquid, with good profitability and asset quality.
- Bank profitability will moderate as policy rates have fallen.
- Pockets of vulnerability warrant close monitoring of credit risks.
- Signs of moderation in the commercial real estate (CRE) downturn; banking system has capacity to absorb rather than amplify this downturn, but significant uncertainty remains and the sector may continue to face headwinds.
- Continue efforts to improve operational resilience of domestic banks and divest government stakes.
- International banks’ vulnerability to funding stress and shocks from nonbanks should be closely watched.
- Market-based finance and nonbanks:
- Ireland has a large, complex market-based finance sector with growing linkages to the domestic economy.
- Vulnerabilities include liquidity mismatches and the leverage of investment funds that could amplify shocks and transmit them through interconnectedness.
- Strengthen regulation and supervision of nonbanks and address data gaps in collaboration with other jurisdictions.
- Strengthen reporting requirements for nonbanks and conduct more granular risk analysis.
- The CBI should closely monitor implementation of macroprudential measures for Irish property funds and advance development of a macroprudential framework for investment funds in collaboration with international regulators and other jurisdictions.
- Reduce data gaps and identify foreign and domestic linkages, including of the “other financial institutions residual (OFI residual)” entities.
- Macroprudential stance:
- The Central Bank of Ireland (CBI) has maintained the countercyclical capital buffer rate at the neutral level of 1.5 percent which appears appropriate in the current macro-financial environment.
- The recalibrated mortgage measures seem to have yielded the intended outcomes.
- The CBI should continue to assess the macroprudential stance and stand ready to adjust if warranted.
- Ongoing stress-testing exercises using adverse macroeconomic and financial shock assumptions, including disruptive geopolitical events and further CRE price declines, can help inform capital adequacy assessments.
Structural policy — findings and recommendations
- Geoeconomic fragmentation:
- Deepening geoeconomic fragmentation increases vulnerability to trade and investment shocks; under adverse scenarios output losses can be substantial from reduced access to critical inputs, tariffs and subsidies introduced by large economies, and a slowdown or reversal of FDI.
- Mitigation strategies consistent with international and European rules can help; international cooperation remains first-best.
- Promote linkages between dynamic MNEs and the domestic economy (including innovation cooperation) and improve infrastructure to increase competitiveness and resilience.
- Maintain fiscal prudence to provide targeted support for resource reallocations (e.g., training and reskilling).
- Continue strong engagement in the EU to further strengthen the single market, including advancing the savings and investment union, and champion a multilateral, rule-based system for trade and investment.
- Digitalization and AI:
- Ireland has significant expertise in AI-related fields due to focus on STEM education, collaboration between academia and business, and presence of innovative large MNEs.
- Technological advancements can enhance growth but may negatively affect some jobs.
- Policies needed to ensure equitable adoption of AI, including adjustments to the tax and welfare system as needed, along with targeted education and training.
- Housing and infrastructure:
- Address infrastructure needs, ease housing regulatory constraints, and increase productivity in the construction sector to boost housing supply and support sustainable growth.
- Affordability remains a challenge; housing supply needs to be expanded to bridge the gap with growing demand.
- Key measures: increase urban density and construction sector productivity, improve use of land, ensure greater policy certainty, and expedite the planning process.
- Use policy levers (planning certainty and infrastructure investment) to leverage private capital and convert vacant offices into residential space where feasible.
- Increase rental supply by reducing complexity and restrictiveness of rent legislations, notably replacing rent caps with more targeted housing support for vulnerable households.
Closing
- The team thanks the Irish authorities and other stakeholders for their hospitality and candid, productive discussions.
Source: IMF Communications Department — Ireland: Staff Concluding Statement of the 2025 Article IV Mission (April 4, 2025).