The IMF has recommended the abolition of tax breaks for property owners and shorter national wage agreements in its latest assessment of the Irish economy.
Following its annual consultation with the Government and its agencies, the Washington-based institution commended the sound economic policies that have led to the "impressive performance" of the Irish economy.
However, the IMF cautioned that a property crash triggered by an economic shock would have a serious impact on the economy given the rapid growth in credit and therefore welcomed the central bank's efforts to warn borrowers of the risks in overextending themselves.
IMF
The IMF viewed the strong preference in Ireland for owning property as a "compelling reason" not to provide additional incentives in the form of subsidies to home ownership.
The Department of Finance was advised to consider removing the interest-deductibility of mortgage payments on primary dwellings, and introducing a market-value-based wealth tax on property, graduated to tax second homes at higher rates. These measures would be taken over the medium term, the IMF said.
Although it noted the moderation in pay claims negotiated in the most recent national pay deal, the IMF said the increases do not take into account "past erosions in the level of competitiveness or the risks of further euro appreciation."
To address this wage inflation the IMF is calling for an extended period of "wage restraint as well as for increased wage flexibility within the social partnership".
This could be achieved by shortening the duration of national wage agreements from three years.
The IMF called on the Minister for Finance to resist the temptation to increase spending at a time of buoyant revenue as this would raise inflation, hurt competitiveness, and limit value for money.
The IMF shared the Government's view that concerns about the level and quality of public services and infrastructure should be addressed by improving delivery rather than by raising tax and expenditure ratios.
The IMF is forecasting a GNP growth rate of 5 per cent in 2005 but in the longer term the key challenge for Ireland will be to manage the transition to slower growth.
"The transition to slower growth will require adjustments in expectations in labour and housing markets, and also in fiscal policy," the IMF said.