IMF tells Ireland to set out its medium term cost-cutting plans
The International Monetary Fund told Ireland to map out its medium-term austerity plans when it announces its budget for next year in three months time, something the government has so far been reluctant to do.
The Washington-based body, one of a trio of lenders overseeing Dublin’s 85 billion euro (US$107 billion) bailout, made the call when it cleared the way for the next disbursement of funds to Dublin, praising Irish authorities for their “strong ownership” of the rescue program.
But the demand for “greater clarity” on future budgetary plans will put further pressure on Ireland’s ruling coalition, which this week showed its first signs of creaking since coming to power 18 months ago after unpopular emergency health cuts upset some among its ranks.
“Sound budget management has continued in 2012 yet significant further consolidation is necessary,” IMF First Deputy Managing Director David Lipton said in a statement, referring to the continued austerity drive needed to cut Ireland’s large budget deficit.
“The 2013 budget should focus on high quality measures that are durable and equitable, and also provide greater clarity on measures to be adopted in later years.”
Ireland’s government has laid out how much it plans to raise in taxes and cut in spending for each of the next three years but will not detail where the savings will be found for next year until December’s budget, something analysts see as damaging to fragile consumer sentiment.
Budgetary measures introduced this year have mostly been successful with data on Tuesday showing that tax returns, although weaker than expected in August, remained resilient. This means Dublin will likely meet the terms of the EU/IMF bailout this year despite the overrun in healthcare spending.
That performance achieved with a backdrop of economic headwinds coming from Europe helped persuade the IMF to give the green light to another $1.15 billion loan disbursement, bringing the total funds it has dished out to US$24 billion.
To meet the terms of the agreement, Dublin is now wading through an unprecedented eight-year austerity drive to reduce a budget deficit that at 9 per cent of gross domestic product was the among the biggest in the European Union last year.
Dublin needs to reduce its deficit to 8.6 per cent of GDP by the end of this year and to 7.5 per cent of GDP in 2013.
The IMF said this year’s target was achievable given the country’s performance so far. Ireland, however, needs to continue to reform its financial sector to bring the economy back to health, said Lipton, the IMF’s No. 2 official.
“The economic recovery is tentative and unemployment unacceptably high. Putting the financial sector into a position to support the recovery will require continuing efforts to return banks to profitability,” he said in a statement.
The IMF highlighted the need to wean lenders off the expensive government guarantee covering bank deposits and said authorities are preparing a roadmap to do so while at the same time preserving financial stability.
Ireland returned to long-term debt markets in July for the first time since its bailout in November 2010, after European leaders decided to look at improving the terms of the country’s bank rescue.
Most analysts say more action is needed in order to resume sustainable long-term borrowing.