Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

The IMF report and Ireland’s competitiveness

The latest IMF report on Ireland is out. This is a quick overview. The report contains three sections, one on the economic outlook, one on Ireland’s financial system and the last section on the Exchequer. I’ll leave the middle section to the experts, for example this discussion on, and will focus my comments on the first and last sections.

Ireland’s economic outlook

The IMF sees an overall economic contraction between 2008 and 2010 of 13.5%. But for net exports contributing towards Ireland’s growth in each year, the overall contraction would be much closer to 20%. Net exports are making a positive contribution towards Ireland’s growth because imports are falling faster than exports, hence it is unlikely that the internationally trading sector will do anything to ameliorate Irish unemployment. Falling prices are welcome to an extent – they represent a competitive adjustment – but also pose challenges, particularly as they make real interest rates quite high.

Competitiveness and wages

In relation to competitiveness, the IMF believes that a fall-off in global demand for traded services, including finance, will hinder Ireland’s recovery by restricting export growth in what had been Ireland’s fastest growing export segment. Looking at the relationship between wages and competitiveness, the IMF believes strongly that wage growth has been problematic – as does Kevin O’Rourke, incidentally, while Ronnie O’Toole and Michael Taft disagree on the point that wages are a competitive problem. The IMF, in my opinion, neatly summarised the issue when it said that wage growth had been moderate and sustainable/competitive in the 15 years to 2001 but that since then, driven by huge increases in public sector wages (i.e. benchmarking) have risen above competitive levels.

Overall, they use real exchange rate data to suggest that a 15% relative adjustment is necessary in Irish wages compared to our eurozone counterparts. The IMF analysis of competitiveness suffers from two small-ish mistakes or misunderstandings, in my opinion. The first was using $ data for their FDI market share: a quick look at their graph which shows the Netherlands dwarfing other countries should have alerted them to the pitfalls of that metric, as opposed to say number of FDI projects or number of jobs to be created by those projects. Incidentally, Ireland’s performance is much better by those metrics. The second was what I will term their overly inflated sense of the capacity of the Competition Authority. I am a firm supporter of solid and well-implemented competition law – indeed, it’s because of that belief that I reckon the Competition Authority simply doesn’t have the resources to do all I – and the IMF – believe it should.

The Exchequer

I have spent quite a bit of time on the Irish Economy section of my blog discussing how best to readjust our tax system to give the government about €40-42bn in sustainable revenues. To date, I have not yet analysed expenditure cuts – bar posts on pay of public sector workers in general and teachers in particular –  although I fully intend to do so over the coming two months or so. The importance of expenditure cuts is highlighted with this paragraph from the IMF report:

The international evidence is clear: fiscal adjustment should focus on expenditure cuts. While there remains scope to raise tax rates and especially to broaden the base, the rapid growth in Irish public expenditure relative to other countries in the OECD, creates scope for significant fiscal expenditure cuts in Ireland.

Public sector pay represents about 10% of GDP, while social welfare expenditures amounted to almost 15% of GDP in 2008. It is in these two chunks that the bulk of adjustments will have to be found, by making pay better reflect economic realities (such as wages of private sector or eurozone counterparts) and by ensuring that transfers are targeted at those that need them most.

On the tax side, I think the IMF has called it wrong in some areas and right in others. They refer to ensuring that income tax rates revert to ‘more normal levels’ – the actual rates are not out of line with other countries, it’s the point at which people start to be taxed that’s way out of whack. They get it right when they say that Ireland must get back in line with the rest of the developed world and have a property tax, but they get it wrong when they say that ‘significant administrative challenges’ mean it will take time. As I explained earlier this week, political will, not the administrative challenge, remains the only real stumbling block to a property tax in Ireland. Their alternative – increasing the tax wedge – is hardly good for Ireland Inc.

Leave a comment