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IMF wants harsher budget cuts to lower deficit

The IMF has urged Minister for Finance Michael Noonan to cut its budget deficit much more quickly in the budget—the last before the election.

The warning — delivered in its third post-bailout monitoring report published yesterday — implies the IMF wants the Coalition to rein in its budget plans and think more about paying down the national debt.

The IMF also appears to come down on the side of the banks in their dispute with the Government about their need to keep interest rates at relatively high levels.

In April, the Department of Finance, in its Economic Statement, projected that, because of the strength of the economic recovery and booming tax revenue receipts, it had room for a give-away budget of €1.2bn to €1.5bn.
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Mr Noonan has indicated that an expansionary 2016 budget in October would be evenly split between spending increases and tax cuts and that he would still have the fiscal clout to reduce the annual budget deficit and cut into the huge national debt created by the banking crisis.

The IMF strongly endorses the Government’s economic growth forecasts, saying the “economic rebound is in full swing” and projecting that the economy will grow 4% this year and by 3.3% in 2016.

Those forecasts compare with Government projections for growth of 4% and 3.8% this year and next.

However, in something of a reprimand, it says that the Government risks repeating the mistakes of the past if it did not use its current tax bounty and the fruits of faster-than-expected economic recovery to reduce the deficit more quickly.

“Locking in this faster progress toward fiscal balance while growth is especially strong requires avoiding a repeat of past spending overruns,” the IMF said.

“The authorities’ target for a deficit of 1.7% of GDP in 2016 would imply fiscal adjustment that is too modest given Ireland’s high public debt and strong growth. Hence it is essential that a likely out-performance of revenues be saved in order to avoid delaying adjustment to a period when growth may well be weaker.”

On a health check of the banks, the IMF said their profitability had improved, but more needed to do be done to secure their financial future.

The IMF reports also appears to back the lenders over interest mortgage interest rates, saying that their non-performing loans remain at elevated levels and that they need to safeguard their ability to lend credit into the expanding economy.

“The operating profitability of banks has risen but remains low,” says the report. “To ensure that banks are able to sustain a credit expansion in support of recovery, lending interest rates must enable banks to cover future loan losses and also build and maintain adequate capital.”

And the IMF also sides with the banks about the bankruptcy regime here, saying that “an efficient repossession system” would help in cases where efforts at restructuring of debts or other solutions have run their course.

It says the Government is on the right lines with its strategy to recoup the huge sums injected into the lenders during the crisis by selling its stakes in the banks, adding that the sale earlier this year of 25% of Permanent TSB showed that investors have an appetite to buy shares in banks.

Article Source: http://tinyurl.com/kbwqb42

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