June 24, 2016
PRESS OFFICER: Olga Ilinichna Stankova
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Key messages
Ireland’s economy has seen a remarkable turnaround, thanks to the hard work of the people and government. Broad-based economic growth is solidifying and unemployment is receding. Public finances are strengthening and the government’s debt-to-GDP ratio is on a downward trend. Private sector financial health is improving. Looking ahead, the main policy challenges are to complete the recovery, ensure that its fruits are broadly shared across the population, and strengthen the resilience of the economy to shocks. This will require (1) achieving sound public finances and further debt reduction to rebuild policy buffers; (2) tackling the remaining crisis legacies and further improving private sector balance sheets; (3) mitigating the scope for boom-bust cycles to prevent a repeat of the last crisis; and (4) addressing structural weaknesses to support robust, sustainable, and inclusive medium-term growth and job creation.
Strong outlook and downside external risks
1. Ireland’s economic outlook remains strong but vulnerable to external shocks. Growth is set to reach 5 percent in 2016 and expected to converge to its medium-term potential of about 3 percent thereafter. Domestic demand is projected to remain the main driver with robust private consumption on the back of continuously improving labor market conditions and vibrant investment activity. However, risks—largely external—are tilted to the downside. In particular, the vote in the UK to leave the EU, if accompanied by a marked slowdown in the UK and in the rest of Europe and a surge in financial market volatility, would have a significant adverse effect on Ireland in light of the strong trade and financial linkages with the British economy.
Attaining sustainable public finances
2. The government’s plan to address social needs while ensuring sound public finances and a durable debt reduction is commendable. Ireland has established a remarkable track record of fiscal rectitude and exited the Excessive Deficit Procedure in 2015. Despite some health spending overruns, the budget deficit is projected to narrow to less than one percent of GDP in 2016 due to strong revenue performance. Windfall revenues should be saved to reduce the public debt further, thereby helping rebuild room for fiscal policy maneuver. The newly released Summer Economic Statement allocates the fiscal space available under the EU’s Stability and Growth Pact rules to further expenditure increases and tax cuts from 2017 onwards, and also to a rainy-day fund from 2019. Under these policies, the medium-term objective (MTO) of a structural budget deficit of 0.5 percent of GDP in 2018 appears broadly achievable. Going forward, the government’s intent to outperform the MTO is appropriate in light of the need to build adequate fiscal buffers to deal with potential negative shocks. This would also prevent additional fiscal stimulus when economic activity is projected to remain above potential and allow general government debt to decline significantly.
3. Fiscal policy can be more supportive of job-rich growth. Priority should be given to rebalance the tax mix and broaden the tax base, while improving spending efficiency and addressing infrastructure needs.
Achieving sustainable growth and increasing inclusiveness
4. Making Irish-owned firms more dynamic and productive would foster robust and sustainable growth over the long term. Total factor productivity growth has been lackluster in recent years, with differences between domestic firms and Irish affiliates of multinationals. Domestic small and medium-sized enterprises lag behind, reflecting limited access to finance, low innovation activity, and weak financial soundness. Policies should therefore focus on broadening financing options for firms, and increasing direct public sector support of their innovation activities, including through closer partnerships with education institutions. A more proactive approach to debt restructuring for distressed but viable firms would also support higher productivity.
5. Addressing structural impediments would strengthen job creation and make growth more inclusive. While the labor force is well educated, skill mismatches are relatively high in some segments. In addition, youth and long-term unemployment rates remain elevated, the latter particularly among adults with lower educational attainment. Enhancing labor activation policies and expanding technical and vocational programs would help retool skills and increase the likelihood of finding employment. Furthermore, female labor force participation is among the lowest in the EU. Policies to address the high cost of child care and its variable quality, and reduce high marginal income tax rates on second earners would strengthen incentives for women to enter the labor market.
Macro-financial policies: Tackling crisis legacies and mitigating boom-bust cycles
6. This year’s consultation coincided with an in-depth assessment of the Irish financial sector under the IMF’s Financial Sector Assessment Program (FSAP). Key findings include:
7. Recovery in the banking system is forging ahead, yet challenges persist. Banks’ pre-provision profitability, albeit increasing, remains modest and prospects for further improvement are clouded by several factors, including continued deleveraging, prevalence of low-yield tracker mortgages, and unresolved distressed loans. In the current low-interest environment, supervisors need to be even more vigilant to ensure that profit seeking is supported by appropriate risk management. Mortgage lending rates should adequately reflect market conditions, legacy burden, and credit risk, including difficulties in realizing collateral. Disposal of the government’s stakes in the banking system should continue. This would further reduce public debt.
8. The resilience of the non-financial private sector to shocks needs to be bolstered further. Household indebtedness is still high by international standards. The share of distressed loans–although declining–remains elevated, particularly mortgages in prolonged arrears. Intensified efforts should continue to resolve these loans, supported by the legal process, to incentivize cooperation between borrowers and lenders. Further restructuring of distressed loans to the most vulnerable, but viable, firms would support a durable expansion of economic activity and reduce corporate sector’s vulnerabilities. Continued care is needed to ensure that provisions remain adequate.
9. A potential buildup of new imbalances in the property market needs to be prevented. The introduction of macroprudential measures on mortgage lending appears to have mitigated pressures in the residential property market by curbing expectations of further price appreciation. These measures should be maintained as a permanent feature of the mortgage market to safeguard the resilience of banks and households against shocks. The Central Bank‘s intent to periodically assess the impact and effectiveness of these measures is welcome. Once the Central Credit Register becomes operational, the loan-to-income limit should be replaced with a debt-to-income limit, which better captures borrowers’ repayment capacity. As housing supply remains constrained, additional policy actions should help expedite new construction. Demand pressures in the commercial real estate market need to be closely monitored and policy tools activated if risks to financial stability emerge.
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The mission thanks the authorities for the open and productive discussions and warm hospitality.
