Monday 17 September 2012

IMF paints painful scenario with more pain on way for taxpayers



F IN the mood it is sometimes possible to draw some wry amusement from re-reading comments made about the Irish economy during the height of our illusory boom.
Take this beauty from 2006 as an example: "Reflecting the strength of the economy, the banking system is well capitalised and profitable, and non-performing loans are low … even in an extreme scenario involving a sharp rise in unemployment and a sharp decline in house prices, capital remains adequate in every bank," what was regarded as a major report at the time said.

This report went on to claim that "recent stress tests indicate that the major lenders have adequate buffers to cover a range of shocks". Related to this, it said that ‘a contraction of the construction sector to a more sustainable size over the medium term is likely to be smooth.’ And there was more: "even a substantial withdrawal of private-sector deposits would not exhaust the stock of liquid assets at any major lender." It argued that the "general approach of the Central Bank and Financial Regulator is appropriate for the mature and sophisticated financial market."

Wonder who wrote all of this guff? Was it, for example, from an annual report of one of the banks, such as AIB or Anglo Irish Bank? Or was it from one of the many cheerleader economists who were much in vogue at the time? Or given that, in discussing the overall state of the economy, it specifically praised then Taoiseach Bertie Ahern and then Finance Minister Brian Cowen, and said that "economic performance remains strong, assisted by good policies … fiscal policy has been prudent", could it be that it was a self-laudatory Fianna Fáil document?

As it happens it was written by a team led by a chap called AJ Chopra. You probably recognise the name. He’s the doleful looking Indian member of the International Monetary Fund who strolled the streets of Dublin in Nov 2010 as he introduced the now infamous bailout. The above guff came from an official report by the IMF, which is supposed to know about such things and to call out any spoofing by the nations it reviews. Chopra and his mates fell for the myths about the Irish economic miracle.

And Chopra’s the guy who co-authored another report, released on Monday, into the state of the Irish economy and which caused political paroxysms, especially when it recommended the introduction of a property tax at an annual rate of 0.5% of the market value of a property. (If you own a property that might sell for €300,000 on the open market then you would be expected to pay a new tax of €1,500 each year, on top of income taxes, refuse charges and whatever separate water charges will soon be introduced.)

Chopra and his ilk had more recommendations for the Government too. They want to use the Croke Park Agreement to cut the public sector pay bill further by tackling allowances and sick pay and reducing overtime, notwithstanding the financial hardship that has been inflicted on many in the public service in recent times. Reducing the cost of delivering the essential health service seems a particular priority: "In health, potential reforms could include new working models to minimise premium and overtime payments, greater use of primary care rather than hospital stays, and substantially increasing the currently low share of generic drug use."

The IMF also wants radical change in our third-level education funding, raising the possibility of the reintroduction of fees for many courses and the introduction of a special system of student loans. It pointed out that Ireland was spending "significantly more" than the OECD average on health and education but that performance in the sector remained only about the OECD average.

The IMF wants to attack pension costs to the State, particularly as life expectancy rises and more people are joining the ranks of pensioners. Although figures yesterday show inflation has risen to 2%, the IMF has noted that pension provision was not affected in recent years as prices were falling. A figure of €11 per week in pension reduction has been mooted. Those pensioners who angrily defended their free medical cards a few years ago may have to do so again if means testing is introduced. Means testing, or taxation, seems to be coming for child benefit entitlements, previously something given equally to all despite their financial circumstances. The report said keeping expensive universal supports and subsidies like child benefits and pensions at current rates was "difficult to justify under present budgetary circumstances".

Much less commented upon from the report was the IMF’s suggestion that "options to broaden the PRSI base could be examined". What should worry the hell out of motorists is its view that "there is also scope to expand the well-designed carbon tax to all fuel types, and to redesign vehicle taxes in a way that can provide significantly higher revenues, while fully preserving incentives for environmental conservation." In other words, expect more expensive petrol and diesel and increased motor tax rates.

Those things will have to happen because, under the existing deal with the troika, a further €3.5bn of tax increases and Government spending cuts is required from the next budget. That’s what the previous government agreed, as part of a multi-year agreement, with the lending troika. The total must be met if the IMF and others are to continue lending to our government. It has to make the choices as to how to reach the overall figure required of it.

Finance Minister Michael Noonan made much of the fact that "it is not mandatory to accept any of the advice. It is simply advice."

That is true, but you have to wonder about the choreography of this. Noonan admits that he has no option, under the terms of the agreement, to introduce a much hated property tax, but stands up to it by saying it will not be 0.5% of the market value of the property. "On the IMF advice that it should be 0.5% of the value, which would bring in about €1bn, I would not propose to the Government at that level," he said. "I think it’s too high."

But if he doesn’t do that he has to find tax increases elsewhere. Being seen to stand up to the IMF on property tax will give him some limited cover in doing this. But what he does is also likely to be guided by IMF comments that too many Irish people are outside of the income tax net altogether at lower levels and that the top marginal rate of tax is applied at too low a level.

The 2006 and 2012 IMF reports have one thing in common. They are independent analyses, but they are drawn up after considerable consultation with the Irish Government and its officials. The IMF and the Government buy into most of each other’s points of view. It is the IMF’s interests — as it wants its money back — to help the Government in achieving the objectives it states for it. So I imagine that by asking for €1bn in property taxes it knew it would bring about a situation where it might get half. And it has helped the Government’s likely public statements at budget time by floating the idea of higher motoring charges and by emphasising the need for reducing the national budget by €3.5bn.

As to whether we should take the IMF seriously, given its analytical failures of the past? Each of its contentions last Monday should be assessed on their own merits. And according to the realisation that it calls many of the shots.

* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.



http://www.irishexaminer.com/opinion/columnists/matt-cooper/imf-paints-painful-scenario-with-more-pain-on-way-for-taxpayers-207508.html

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