Brexit and corporate tax changes main risks to Ireland, says IMF

Brexit and possible changes to global tax laws pose the biggest threats to Ireland's economy, according to the International Monetary Fund (IMF).

However, the Washington-based fund said the economic outlook for the country remains “broadly positive.”

The fund said Ireland’s economy continued to grow at a healthy pace in 2016 due to strong domestic demand and despite headline inflation hovering in negative territory during most of the year.

In its sixth post-bailout programme, the IMF said “continued vigilance” is needed to safeguard macrofinancial stability”, especially relating to the property market.

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“The macroprudential measures introduced in 2015 serve an important role in strengthening the resilience of banks and household to adverse shocks. The recalibration of the macroprudential framework is reasonable given early experience with the framework and current dynamics in the housing market,” it said.

The fund welcomed the commitment by the Government to reach its medium-term deficit target of 0.5 per cent of GDP by 2018, establish a “rainy-day” fund beginning in 2019, and reduce debt-to-GDP to 45 per cent within a decade.

It also said it supports moves to use alternative measures for domestic activity given that the impact of operations by multinationals on headline gross domestic product can seriously distort figures.

“The economic outlook remains broadly positive, notwithstanding risks, and the capacity to repay the fund is strong. Robust domestic demand is projected to drive continued healthy growth, supporting further moderation in unemployment. Inflation, which turned slightly negative this year, is expected to edge up gradually,” it said.

Anti-globalisation sentiment

“Brexit-related risks, a sustained low growth/low inflation environment in Europe, external political uncertainties and rising anti-globalisation sentiment, as well as ongoing developments in corporate tax treatment at the international level add to uncertainty,” the IMF added.

The fund notes said while the minority Government faces challenging conditions, securing widespread agreement on the recent budget represented an important milestone for the country.

“The Government’s fiscal targets are broadly appropriate. Given Ireland’s strong track record of fiscal discipline, the moderate adjustment planned in 2017 strikes a reasonable balance between advancing deficit reduction and addressing public expectations for a growth dividend. Expenditure increases beyond those already programmed would need to be offset by tax increases or cuts in other spending to meet the deficit target, requiring difficult trade-offs,” it said.

“More broadly, still high public debt and risks to the outlook and to the revenue base, including from the concentrated corporate tax base, call for maintaining moderate growth in expenditures, saving any revenue windfalls, and ensuring that potentially temporary revenue gains are not used to fund permanent expenditure increases.”

While noting a continued decline in unemployment numbers, the IMF said fiscal support for job-rich growth could be strengthened by widening the tax base, enhancing spending efficiency, and increasing capital expenditure, especially in infrastructure.