Former IMF official warns austerity could be ‘self-defeating’ for Ireland

A former senior IMF official has warned that austerity must end for the economy to grow while a Labour Party paper has said more welfare cuts "may not be politically deliverable".

Austerity was a “potentially self-defeating policy” because of the lack of growth and no reduction in debt levels it had resulted in, said former IMF chief of mission to Ireland Ashoka Mody.

"We have to ask ourselves why Ireland is not growing . . . It's hard for me to believe that austerity is not contributing to this," he told RTÉ's This Week.

It had become “orthodoxy that the only way to establish market credibility” was to pursue austerity policies. But five years of crisis and two recent years of no growth needed “deep thinking” on whether this was the right course of action, said Mr Mody.

Asked whether Ireland should implement a €3.1 billion reduction in spending in this year’s budget demanded by the EU-IMF troika he said this figure should be “considerably lowered”. “I would even ask the question why can we not imagine and consider the possibility that for the next three years, as an experiment, there be no further fiscal consolidation,” he added.

“The only instrument left to address this in the short term is the fiscal instrument and that requires complete rethinking of how aggressive and how persistent the austerity has to be,” Mr Mody said.

There was “not one single historical instance” where austerity policies have led to an exit from heavy debt burden. Changing policies could possibly lead to growth, reduce debt levels and also prompt a “psychological boost” for the economy, he added.

Mr Mody said the likelihood of Ireland getting money back form the European Stability Mechanism for its legacy banking debt was “almost zero”. “I would be astonished if it happens,” he added.

During a meeting last week the EU-IMF troika urged the Government to deliver a €3.1 billion cut in budget spending. But some Ministers are resistant to such level of cuts.

A paper circulated among senior Labour Party officials states budget cuts will have to be "lowered considerably". The level of welfare cuts expected in this October's budget are "very problematic and politically undeliverable", the Sunday Business Post reported. The cuts would be "regressive from a poverty perspective and have a disproportionate impact on certain cohorts", the paper added.

Minister for Finance Michael Noonan said last week the Government would not be ending its austerity policy, despite savings made after reform of debt deals.