The International Monetary Fund has predicted Irish economic growth to remain good in the short-term, but said it was less impressive than expected earlier in the year.
In an assessment released yesterday, the Washington-based institution praised Ireland's flexible labour markets, but criticised Irish budgetary policy. It called on the Government to rein in public expenditure and broaden the tax base in the next budget.
Following its latest so-called "article iv" consultation with Irish authorities, the IMF expects Gross Domestic Product (GDP) - which measures the amount of goods and services in the economy - to grow by 4.5 per cent this year.
It had previously predicted GDP to grow by 5.4 per cent.
Business lobby Ibec also released an economic forecast yesterday and expects growth to reach 4.6 per cent this year. This contrasts with estimates from the Economic and Social Research Institute (ESRI), which recently forecast GDP to grow by 5.7 per cent this year, and the Department of Finance, which forecast growth of 5.1 per cent.
The latest IMF forecasts were welcomed by the Minister for Finance, Brian Cowen. "I am pleased that the IMF has commented favourably on the continuing impressive performance of Ireland's economy, which it states is based on maintaining sound economic policies," he said. "I agree with the IMF that a prudent taxation policy is a pillar of sustainable economic growth."
In the report, the IMF executive directors praised Ireland's policies of low labour taxation and business income, as well as wage moderation: "Labour market flexibility in Ireland is good, as reflected in rapid employment growth and low unemployment . . . largely due to reforms of the tax and benefit systems, which has produced one of the lowest tax wedges among industrial countries."
However, the directors expressed concern about "procyclical" budgetary policy, and called for spending restraint and more diversity in the tax base.
"Ireland's public finances are strong, but fiscal policy has been pro-cyclical in recent years. However fiscal policy was expansionary during 2001-02, when economic activity was somewhat higher than potential, and contractionary during 2003-04, when the output gap was negative. The 2005 budget implies considerable fiscal stimulus, at a time when the economy is widely regarded as being close to full employment."
The report called for monitoring of the housing market and increased financial supervision.
"Continued supervisory efforts are essential to limit excessive risk-taking by lenders and borrowers; stress-testing could be enhanced and conducted more frequently, credit standards could be strengthened and interim updates to the Financial Stability Report could be prepared."
Fine Gael's finance spokesperson, Richard Bruton TD, said the IMF report was evidence that the Government's fiscal policies "encouraged a boom and bust cycle of economic activity".
