IMF draws fire away from Government ahead of Budget 2013

“With major decisions regarding this consolidation expected in the coming months, it is useful to take a strategic view of the consolidation strategy adopted thus far, and consider issues guiding the choice of future consolidation measures, taking into account longer-term trends in Ireland‘s revenue and expenditures, and comparisons with other advanced economies.”  IMF Selected Issues paper on Ireland which examines where the new taxes and cuts might fall

Isn’t it amazing that RTE is reporting a prompt rejection by Minister Noonan of the IMF proposal of imposing a 0.5% annual property tax on Irish homes, but at the same time promoting the IMF’s calls for a deal on the bank-related debt shouldered by the State – in the interests of balance, you might have thought RTE would seek a comment on the bank debt proposal from our partners in Europe, but no, the IMF are villains on one hand for proposing an expensive property tax but heroes for promoting a bank-debt deal. Regardless of RTE’s editorial position though, you can bet that the Government is secretly delighted that the IMF has drawn fire away from recent Government fumblings, with the publication yesterday of its latest review of Ireland together with a special report on “selected issues” to help deal with the deficit and economic downturn.

It is the second of yesterday’s two IMF publications, the “selected issues” that is causing all the bother – it is a document well worth an hour or two to read, it might make suggestions which are unpalatable but the analysis presented is thought-provoking; it is section III on page 28 onwards titled “Medium Term Fiscal Consolidation in Ireland: Growth-friendly, targeted, sustainable” that contains the unpalatable proposals reported in the media over the last 24 hours. You will uncover nuggets like Ireland having the second highest spend on its public health system in the world in terms of % of GDP but having health outcomes which are distinctly mediocre, in Ireland 1/5th of prescribed medicine is generic, in the UK it is 4/5th. You will find that we are both a high tax country with high marginal income tax rates cutting in just above the average wage level (€32,400) but we are a low tax country for those earning less than the average wage. We already have property taxes(!) with €2.5bn a year collected in local authority commercial rates. Our minimum wage is 30-40% above that in the UK and Europe. We spend just over €2,000 per unemployed person on training and assistance to get the unemployed back to work, that compares to over €4,000 back in 2007. Public sector salaries have declined by more than the private sector during this crisis – lots of nuggets in here.

The IMF’s publications yesterday will strike fear into the hearts of many who suspected that Budget 2013 would be tough, but hoped the burden of cuts and new taxes might fall on others, the fabled wealthy minority mostly. Talk of a 0.5% annual property tax which would mean a bill of €785 for the average €157,000 Irish property, this in a country where, according to Credit Union surveys, about half of all households have about €1,200 a year remaining after paying bills each month, will have been terrifying. Other suggestions of reducing welfare benefits, pensions and the minimum wage will have frightened the most vulnerable. And suggestions of cuts to the cost of health and education will have worried both recipients and providers in both sectors. It should be noted that the suggestions published by the IMF yesterday are just that – suggestions; in fact the “selected issues” is “distinct from the policy discussions for Ireland’s EU-IMF supported programme”

But having been scared witless by the IMF, ministers can now portray themselves as heroes – a 0.5% annual property tax as suggested by the IMF? “Whoist, that’s too much, it’ll only be 0.25%”, a 30% cut to the minimum wage? “no a €1 cut per hour will be enough” cuts to pensions, “no, no but we’ll have means testing or taxing medical cards and other benefits”

In truth, we know that the Government has to close the deficit, a deficit that it inherited in 2011 and we know there is an agreement with the Troika as to the broad areas to be addressed. Having said that, the Government can substitute measures of equal value with agreement from the Troika. So, not only is this not all Fianna Fail fault, but as for the Troika, remember it just wants us to balance our books and pay back the loans it started giving us in early 2011, the Troika didn’t cause the deficit which first arose in 2008 with the banking collapse.

What is concerning is the downgrading in the economic outlook by the IMF – and seemingly the European Commission as evidenced in its recently leaked draft report on Ireland which will be officially published on Friday 14th September [UPDATE: 12th September, 2012. The Commission has advised that publication of the next set of forecasts has been delayed to Tuesday 18th September]. Whereas the Government believes we will see 0.7% real GDP growth in 2012 and 2.2% growth in 2013 – figures from the April 2012 Stability Programme Update – the IMF and seemingly the European Commission believe growth will be 0.4% in 2012 and 1.4% in 2013. Without growth to boost taxes and cut some costs, what these downgrades mean is that we will have a bigger gap to close, so the €3.5bn adjustment in 2013, the €6.6bn cumulative annual adjustment in 2014 and the €8.6bn cumulative annual adjustment in 2015 will need to increase so that we get our deficit below 3% in 2015. How much worse will the adjustment be? Back of the envelope calculations suggest an extra €0.5bn will be needed in 2014 which would mean that the 2014 additional adjustment would be as harsh if not harsher than the 2013 adjustment which will be set out in Budget 2013 unveiled this December.