The International Monetary Fund has called for the introduction of a property tax to help ensure a soft landing for the housing market. In its annual review of the Irish economy, the institution argues that the "possibility of an abrupt unwinding of the housing boom", was one of two main risks to an otherwise benign outlook for the economy.
"The impact of such an unwinding on employment and private consumption could be significant," according to the body.
To prevent this, the Government should consider "introducing a market-based wealth tax on property, graduated to tax second homes as higher rates", according to the report. ...
The IMF recommendation is expected to be echoed by the National Economic and Social Council in its review of the housing market in the coming weeks. The IMF also called for an end to other subsidies and incentives for home-owners, including mortgage tax relief.
A Department of Finance spokesman said it would not comment on the IMF recommendation given the proximity of the Budget on December 1st. In its review, the IMF calls for a modest tightening in the Budget to avoid fuelling inflation. It also urges the Minister to "resist political pressure for increased spending", given that much of the recent improvement in the public finances is down to once-off factors such as the pursuit of off-shore funds.
The other threat to the economy, identified by the IMF, was a significant further appreciation of the euro, which would erode Irish competitiveness. The body called for an "extended period of wage restraint as well as increased wage flexibility within the social partnership" to "address this potential source of vulnerability". This could be achieved by shortening the duration of national wage agreements from three years, said the IMF. It also called for more competition in the domestic market, particularly in the services sector.
Barring the threats identified in the report, the IMF predicts that the economy will grow by 4.5 per cent this year, accelerating to 5 per cent in 2005. Core inflation will remain around 2 per cent, with interest rates increasing "towards more normal levels".
"Over the medium term, real growth is expected to be in the 4 to 5 per cent range," according to the report.
The Minister for Finance, Mr Cowen, said last night the "messages and challenges" identified by the IMF were in line with those he had been highlighting over the last number of weeks. Speaking at the Institute of Bankers' annual dinner, he said there would have to be an adjustment of expectations in the labour and housing markets as well as in fiscal policy.
