The impact of Brexit on Ireland will be "negative and significant", according to a new report from the International Monetary Fund (IMF), which says that the Government must set aside significant resources to deal with the risks ahead.
In one of the starkest warnings yet from an international body on Brexit, the IMF warns of a sizeable potential economic impact, particularly on employment in rural Ireland.
Growth is strong and the economic recovery is well under way, the IMF says.
But with the risk of a hit to growth and tax revenues from Brexit, the IMF has called on the Government to ensure it has room for budgetary manoeuvre and that it does more to tackle key infrastructure problems, particularly the housing shortage.
Levy
In particular, it calls for measures to increase housing supply, including a levy on vacant sites to encourage development.
Ensuring affordable housing is a vital social priority, as well as being important to economic competitiveness, according to its report, issued at the conclusion of its annual assessment of the economy.
On housing, the IMF warns that the Government’s’s help-to-buy scheme, which offers a tax refund of up to €20,000 to first-time buyers, “may add to demand pressures” and says that a planned review is welcome.
Minister for Finance Michael Noonan has said he will commission an independent review ahead of the budget.
There have been almost 4,800 applications for the scheme since the beginning of the year, with 2,580 already approved.
While the Government argues that the scheme is not the fundamental reason for rising house prices, economic analysts have said that the scheme, together with the change in Central Bank mortgage lending rules, have been contributors to the house-price surge.
The latest CSO figures, published yesterday, showed house prices rising at an annual rate of 9.6 per cent in April.
Goodbody stockbrokers economist Dermot O’Leary said there had been “recent evidence of very high demand for new home developments as they have come on stream, with help-to-buy being part of the reason for this”.
Pent-up demand
Mortgage approvals for both first-time buyers and movers surged at the beginning of 2017, Mr O’Leary said, suggesting significant pent-up demand.
With rental costs also rising strongly, the IMF says the impact of caps on rent increases in urban areas – introduced this year to try to assist those renting – need to be closely monitored, given the potentially negative impact on the supply of rental properties. Meanwhile, the Central Bank needs to consider the need for “prudent lending” and banking stability when it reviews its mortgage lending rules later this year.
Tax base
The IMF says that plans to continue to cut the universal social charge could narrow the tax base at a time when a comprehensive and wide tax on earnings is essential to pay for spending priorities.
It also calls for a comprehensive review of tax breaks and of goods and services exempted from VAT, such as most food and children’s clothes.
Also to raise new revenue, the IMF says that the house price valuations used for the residential property tax should be brought into line with market valuations, which would lead to a big increase in tax bills for households. Currently the tax is frozen at existing levels until 2019, at least.
