Mission Concluding Statement 

Ireland: Staff Concluding Statement of the 2017 Article IV Consultation

May 12, 2017

After a sustained period of sacrifice by the Irish people, economic recovery is well underway. Growth is robust and broad-based, and unemployment is at levels not seen in almost a decade. The challenge now is to translate the recovery into a new foundation for sustainable and inclusive growth. This will require “future-proofing” the economy against the reemergence of boom-bust dynamics and broader risks. It will also require well-targeted use of limited public resources for the benefit of all.

1. The medium-term outlook remains positive. Healthy growth is expected to continue, albeit at a moderating pace. Nonetheless, Ireland faces several challenges.

2. External risks are high:

• Brexit represents the most pressing and far-reaching challenge for Ireland. While the impact to date has been modest, the overall effects over the medium term are expected to be negative and significant. Risks are most acute for traditional sectors that depend on trade with the UK, with potentially sizable consequences for activity and employment outside of the main urban centers. The special issues related to the border with Northern Ireland have also been recognized. The authorities are actively engaging with partners in the UK and across Europe, and working domestically to develop a set of measures to respond. Ensuring timely and well-targeted action will be key.
• At the same time, ongoing changes in corporate taxation at the international level and discussion of further reforms in the US and the EU contribute to uncertainty given the sizable role of multinationals in the economy and their substantial contribution to the tax base. This further reinforces the need for a broad tax base, large fiscal buffers, and continuing efforts to reinforce the dynamism of the domestic economy.
• More broadly, uncertainty related to calls for a retreat from global integration is particularly relevant for Ireland given the open nature of the economy, further reinforcing the importance of strengthening economic resiliency.

3. Housing pressures have risen, driven by the mismatch between renewed demand and the lagged supply response following the real-estate bust. Ensuring affordable housing is crucial for the well-being of the Irish population and important to economic competitiveness.

• The government’s Action Plan for Housing and Homelessness appropriately focuses on support for vulnerable families, including through housing for the homeless and accelerated delivery of social housing, as well as measures to kick-start expansion in housing supply. While signs of progress are emerging, a more robust supply response will take time. In this context, actions to reduce administrative costs and streamline the planning process require continued attention. Introducing a well-structured levy on vacant sites and speeding up loan restructuring of distressed, but viable, firms in the construction sector can also help unlock housing supply. The planned review of the recently introduced Help-to-Buy scheme, which may add to demand pressures, is welcome. The impact of administrative caps on rent increases should also be monitored, given the potentially negative implications for incentives to develop a rental market.
• The rapid increase in house prices calls for close monitoring, with a view to maintaining prudent lending and mitigating financial stability risks. The central bank’s annual review of mortgage lending limits provides an appropriate opportunity to consider these issues.

4. Headline indicators overstate underlying economic activity, complicating policymaking: Although Ireland’s economic statistics conform to international norms, they provide an increasingly unclear picture of underlying activity given the large and expanding impact of global activities by multinationals. The authorities’ plans to publish new metrics that filter out such activities are welcome. These metrics will allow for more informed economic analysis and policymaking, providing, for example, a stronger basis to assess the appropriateness of public spending and debt levels than GDP-based metrics.

5. Crisis repair is progressing, but remains incomplete: Steady reduction in still high public sector debt and further repair of bank, household, and business balance sheets will be needed to set the economy on a firmer footing.

• The government’s fiscal plans strike an appropriate balance between providing breathing space following a long period of adjustment and maintaining steady progress in reducing debt and rebuilding buffers in the face of sizable risks. The targeted debt-to-GDP ratio of 45 percent by the next decade and planned rainy-day fund are therefore welcome.
• Domestic banks continue to strengthen their balance sheets and are profitable, but challenges remain, including from Brexit and international regulatory changes. Nonperforming loans, most of which are long-lasting arrears, are declining, but remain elevated. Continuation of intensified supervisory oversight, including efforts to ensure that provisions remain adequate in the context of upcoming IFRS9 implementation, and measures to support greater creditor-borrower engagement will be key to accelerate arrears resolution. These efforts should be complemented by more efficient legal proceedings.

6. Spending pressures are high: While the recovery provides needed breathing room, fiscal space remains constrained. Pent-up demand will need to be managed carefully to ensure that resources are maintained to insulate the economy from emerging risks, meet priority social needs and increase investment to strengthen human capital and infrastructure and support broad-based economic dynamism. Several factors should be considered:

• A broad and stable tax base is needed, particularly given calls for continued unwinding of the universal social charge and concentration risk associated with corporate taxes. A more comprehensive and evenly distributed tax on individual earnings is important if Ireland is to have the resources to address priority needs in a sustainable manner. In this context, a review of tax expenditures should be considered. At the same time, reduction of VAT exemptions and aligning property assessments to increasing market values would strengthen revenue.
• Temporary revenue gains should not be used to fund permanent budget measures. Recent corporate tax windfalls point to concentration risks and potential volatility. In this context, unexpected revenue upsides should be saved.
• Prioritizing use of limited fiscal space will be critical. Given strong spending pressures, it will be critical to maintain sufficient room for priority social expenditures and needed restoration of growth-enhancing capital spending. To this end, the mission welcomes the current expenditure and capital reviews. The recently published report of the Public Service Pay Commission also provides support for a transparent and evidence-based process for upcoming discussions of public sector compensation within this broader context.

7. Building consensus on priorities to sustain high and inclusive growth is key. Ireland’s emergence from crisis provides the opportunity for renewed commitment to an agenda supporting a resilient, dynamic, and inclusive economy across all sectors and regions, serving all of Ireland’s people. An effective strategy will need to reflect Ireland’s growth model – taking advantage of the strong presence of multinationals, supporting the dynamism of domestic enterprises, and mitigating income and regional disparities. Attention should be given to:

• Upskilling and reskilling the labor force and promoting higher labor force participation . Steps to complement the strong primary and secondary education system with vocational programs and broader training would help align educational paths with enterprise needs and contribute to lower disparities of skills, income, and employment across regions. At the same time, sustained efforts are needed to mitigate the impact of economic changes on the most vulnerable, including the long-term unemployed, through ongoing efforts to support access to and effectiveness of active labor market policies. Costly childcare remains a critical barrier to female labor participation, and the government’s commitment to improve affordability for low-income and disadvantaged families is welcome.
• Addressing infrastructure gaps would reduce bottlenecks to investment and support labor mobility. The National Planning Framework for spatial development provides an opportunity to prioritize capital planning and guide policy decisions in a strategic manner.
• Promoting domestic SMEs’ innovation through expansion of government support for SME-driven R&D, including direct funding measures, will help increase dynamism in the domestic economy. Continued efforts to support SME collaboration with MNEs and research centers can help overcome knowledge barriers and increase linkages to foreign markets. Ongoing measures to support SME financing also are key.

The IMF team would like to thank the authorities, as well as representatives from the private sector and civil society for candid and productive discussions and their warm hospitality.