IMF warns Government over proposed budget adjustment

The International Monetary Fund (IMF) has issued a stern warning to the Government over its budget plans, claiming the proposed deficit-reduction target is "too modest" given the size of the public debt.

In its latest post-bailout report, the Washington-based fund also cautioned the Coalition about raising public sector wages too rapidly and pinpointed the continuing “rapid rise” in commercial property prices as a significant risk.

The IMF prefaced its warnings, however, by stating that Ireland’s “economic rebound was now in full swing” and that budget outturns this year were off to an excellent start.

After growing by 4.8 per cent last year, the fastest rate in Europe, the Republic's economy would expand by another 4 per cent this year aided by "highly supportive" financial conditions, the IMF predicted.

Sizable buffer

While unexpected developments in

Greece

remain a downside risk to recovery, it noted

Ireland

had limited direct exposure to Athens and the Government’s current cash position provided a “sizable buffer”.

Nonetheless, it used its third post-programme report to point out that solid progress toward a fiscal balance should be made while the economic conditions were favourable.

“Locking in this faster progress toward fiscal balance while growth is especially strong requires avoiding a repeat of past spending overruns,” the fund said.

With the general election looming, Minister for Finance Michael Noonan has signalled plans for an expansionary budget of between €1.2 billion and €1.5 billion. This is predicated on cutting the budget deficit to 1.7 per cent of gross domestic product in 2016.

However, the IMF claimed more of the growth dividend should be used to bring down the State's high public debt, echoing a recent warning by the Fiscal Advisory Council, which also claimed the Coalition was breaking EU fiscal rules by adopting such an approach.

“The authorities’ target for a deficit of 1.7 per cent of GDP in 2016 would imply fiscal adjustment that is too modest given Ireland’s high public debt and strong growth,” the IMF said.

With some 300,000 public- sector workers scheduled for pay hikes from next January under the terms of the Lansdowne Road Agreement, the fund also warned the Government about raising public-sector wages too quickly.

“It is critical that any unwinding of savings in public sector wages be gradual and that efficiency gains continue,” it said.

Despite progress made, the IMF said problems remained in the wake of the crash, particularly in the area of mortgage arrears, noting the overall level remained “very high” and that rising share of mortgage arrears were becoming “prolonged”.