Download Policy Challenges for the Irish Economy Prepared for EC Country Seminar

Policy Challenges for
the Irish Economy
Prepared for EC Country Seminar
“Future Directions for the Irish Economy”
in collaboration with Trinity College Dublin
January 10th 2014
Craig Beaumont
Assistant Director, European Department
International Monetary Fund
It’s a long haul ahead…
Lasting economic recovery for Ireland entails:
• reducing high public & private debts
→ requires sustained primary surpluses, savingsinvestment surplus of households and SMEs
• reviving healthy financial intermediation
→ includes resolving extensive NPLs and broader
changes in financial system
• raising employment from low levels
→ entails sectoral&regional shifts and investment
…subject to Constraints and Risks
• Options constrained: e.g., high public debt limits
approaches to private debt resolution
• High income and relatively less structural issues
limit easy wins on productivity and jobs
• High trade and financial openness:
– pro: avoids domestic market size constraints
and supports financing availability (not SMEs)
– con: much depends on external growth and
financial conditions
Concerted and Coherent Efforts to
Tackle Interrelated Challenges Needed
• Fiscal: how best to build and maintain a sizable
primary surplus to put the public debt ratio on
downward path while protecting recovery?
• Growth: how to promote employment growth
and underpin strong productivity performance?
• Financial sector: how to ensure it provides
services that support lasting recovery while
avoiding fiscal risks?
Fiscal: Steady Consolidation in 2014-15
Budget 2014 seeks solid progress with less drag:
• Consolidation effort of about 1.6% of GDP
• Domestic demand growth main risk to targets
IMF favors steady adjustment in 2015:
• Effort/structural adjustment about 1-1½% of GDP
• If growth on track (2-2½%) deficit below 3% of
GDP in 2015 is achievable
• Avoid undue added adjustment if growth weak
Debt Reduction Framework Looks Sound
• Balanced budget rule likely binding not debt rule
(if nominal growth over 1.5% on average)
• Structural balance appears sound anchor:
• Sizable initial primary surplus, 4-5% of GDP
• Primary surplus can decline as debt falls; helps
to sustain effort & manage aging pressures
• Automatic stabilizers work (operational issues)
• Balance by 2018 (MTES) attractive; suggest
review of phasing in 2015 to protect growth
Reforms key to Protect Core Services, Limit
Growth Drag → Sustain Primary Surplus
Expenditure
• Haddington Road Agreement savings critical to realize
• Public Service Reform and Comprehensive Expenditure
Review help generate savings while protecting services
• Health is key: more concrete steps on Future Health?
Revenue
• Support emphasis on tax base broadening
• Encourage tax mix rebalancing to support growth, e.g.,
from income to VAT and property taxes (O’Connor, 2013)
Healthy Financial Intermediation
• Economic recovery not reliant on lending in nearterm (exports major factor in 2014, employment
gains drive consumption, investment rebound from
low base internally funded).
• But, sustaining growth requires healthy financial
intermediation:
– Banks: bring to self-sustaining lending
– NBFIs: play larger role, e.g., in property
– Regulatory actions?
– What State support for intermediation?
Banking—NPL Resolution Still Main Issue
• Rebuilding profitability: → lasting lending revival
→ return to private ownership
• NPL resolution critical to help reduce risk premia in funding
costs and improve loan payments in some cases:
– Mortgages: implement CBI’s MART framework, supported
by timely and efficient repossession as last resort
– SME loans: underway, CBI to ensure SME viability restored
where feasible—ability to borrow for working capital
– Commercial Real Estate loans on bank books: next priority
• SSM: chance to improve market confidence and cut funding
costs. IMF supports equity backstop to assessment.
NBFIs & Intermediation Role for State?
NBFIs should play a larger role alongside banks:
• Enables sharing and pricing of risk, e.g., financing of
property development
• Facilitate NBFI development but ensure resolution at
no cost to state
Role for State in intermediation?
• SME initiatives: address market failures, but focus on
availability of term financing for investment by
viable SMEs, pricing should not undermine banks
• Infrastructure/strategic (SIF/SIB, NewERA): temporary
backstop, contain fiscal risks, e.g., sufficient private
equity and high transparency
Putting Property Financing on Safer Footing
Property financing with lower vulnerabilities needed:
• Regulation of banks’ sectoral/loan concentration,
esp., commercial property
• Develop U.S. style real estate management; help
unwind buy-to-let debt, useful investment vehicles
• Address supply constraints, e.g., Dublin
Macroprudential policy:
• Begin developing toolkit, e.g., range of policy
options in different circumstances, monitor LTV
ratios to be able to adopt a policy if needed
Reducing Unemployment
• Further Education and Training--timely action to
ensure training meets market needs
• Engagement with job seekers--further redeployment
of staff to front lines to get adequate intensity
• Review of in-work tax/welfare support important,
also look at other barriers to female participation
Wage moderation (given LTU and skill mismatch):
• Flat nominal private wages aided competitiveness
but further gains still helpful for employment
• If wages pick up broadly with unemployment still too
high consider social partner dialogue in this area?
Enhancing Productivity Growth
• Productivity growth prospects face drag from lower
average skills of unemployed and low investment
• Some potential areas (IMF work needed):
– High energy costs: room to increase competition?
– Enforce competition through civil law, if needed
by amendment of constitution?
• Australia’s Productivity Commission: example of a
useful institution to address productivity issues on
ongoing basis? (may already be covered by
Competition Commission, NCC, ESRI etc.)
Conclusion
• Welcome that financial markets are now highly
supportive of Ireland after successful programme
• But Ireland’s full recovery from the crisis plays out
over at least the rest of this decade
• Medium-Term Economic Strategy 2014-2020 has
sound conception of the issues and ambitious
macroeconomic outlook
• Need to now deliver the concrete analysis and
policy implementation to help realize that outlook!