The IMF’s prescription: don’t ease up on the austerity

If the IMF is the doctor, and Ireland the rather sicklypatient, yesterday’s monitoring report can be seen as the latest entry on the chart on the end of the hospital bed.

First, the patient is showing signs of recovery. However, the sickness (debt) is still pretty serious and there is a risk that matters could take a nasty turn (the banks are banjaxed, export markets may experience slow growth and domestic demand may remain pallid). The yucky medicine must continue.

Nervousness

The doctor is worried about the recent election result because of the possibility that political nervousness could encourage the patient to fling the medicine to the floor, put on her slippers, and go for a smoke outside the hospital.

In order to arrive at its stated aim of a zero deficit by 2018, the Government needs to set broad targets, i.e. €2 billion in adjustments for next year, and stick to them.

Ireland has made good progress to date, and should not undo the good work just as it nears the possibility of discharge (albeit with a suitcase full of IOUs).

The IMF has included a few new measures than could be introduced over the coming three years. It “encourages the authorities” to pursue measures that are “equitable, durable and growth-friendly”, before turning, not for the first time in its interaction with the State, to the dangerous topic of “costly universal supports”.

Better targeting

Child benefits, the household benefit package, and subsidies on student fees cost about 2 per cent of gross domestic product (GDP) every year, it says. Better targeting could yield savings of 1 per cent of GDP, especially if the generous means test applied to people over 70 years who want a medical card was reconsidered.

The State could also benefit from paying standard VAT on more items, as well as from the ending of the reduced VAT rate on tourism-related activities.

A lowering of the entry point for when people start paying income tax would also boost chances of recovery.

Reforms in health and higher education should also be pursued.

And though it doesn't say it in the report, on a conference call its main author Craig Beaumont says the IMF still thinks stronger economies in the euro zone should give Ireland a dig-out with its banks as this would add to the prospects of recovery.