IMF – international tax reform poses risk to Irish economic outlook
Ministers Donohoe and McGrath recently met virtually with the IMF as they delivered their assessment of Ireland’s economic and financial developments through the Annual IMF article IV Mission consultation. The IMF noted that premature withdrawal of Government COVID-19 supports should be avoided. The assessment also says that a broadening of the tax base is necessary to finance productivity-enhancing investment in human and physical capital and highlights the risk to Ireland’s economic outlook due to the potential effects of international tax reform.
The IMF issued their preliminary findings in the Staff Concluding Statement at the end of its official visit on Wednesday, 12 May. The IMF discuss the need for balance in Ireland’s economic policy between providing targeted supports for those most impacted by the coronavirus pandemic and facilitating the transition to a greener and more digital recovery in the medium term.
The statement notes that Ireland was the only EU country with positive GDP growth in 2020 due to the growth of multinational enterprise activity. The statement details that, despite the impact of the pandemic, Ireland’s overall deficit was contained at about 5 percent of GDP due to growth in the corporate tax take and the progressivity of the income tax system.
Tax is highlighted as a risk to Ireland’s economic outlook as the challenges in international tax are capable of affecting both the economy and public finances. The IMF calls on Ireland to continue to build on its strong comparative advantages, being a qualified labour force, strong and stable legal and policy environment and favourable business climate, to mitigate the potential impact of international tax reform. Reports indicate that the IMF believe the worst-case scenario on international tax reform could half Ireland’s corporate tax take; however, it is not expected that the worst-case scenario will arise.
Ireland’s fiscal response to the pandemic was similar to European peers but with a significantly larger share of direct supports. The IMF call for the withdrawal of supports to be tapered and gradual, with a need for business supports to be targeted towards viable firms.
The effects of COVID-19 are said to require a broadening of the tax base to finance human and physical capital.
Ministers Donohoe and McGrath welcomed the IMF’s views in a joint press statement and noted the need to address the longer-term structural issues within the economy beyond the immediate recovery from the pandemic.
The IMF is expected to issue its full report later this month.