The IMF's warnings from 1999 make for interesting reading as Ireland readies its bailout exit

By Economics Correspondent Sean Whelan

Given all the recent talk about the Government seeking advice on the end of the Troika bailout, here is some that wasn’t taken on board as the last century ended – the last paragraph in particular.
Taken from Article IV of the IMF’s report on Ireland from August 1999:

“Directors considered that, notwithstanding its long-term benefits, Ireland’s membership in the euro area created additional difficulties regarding demand management in the short run.

The sharp fall in interest rates associated with joining the euro area had come at a time when demand and wage pressures were already intensifying. Ireland’s business cycle was not synchronised with that of the rest of the euro area, resulting in monetary conditions that were not contributing to the containment of inflationary pressures. In these circumstances, most Directors considered that fiscal policy would take on a greater role in stabilizing aggregate demand.

Directors agreed that any relaxation of fiscal policy would be inappropriate. A number of Directors went further, and considered that some tightening of fiscal policies would be appropriate in the near term, if inflationary pressures continued unabated. Some other Directors, however, believed that policy adjustments to lower the level of aggregate demand were not called for at the moment.

They saw the need, rather, for any measures to be addressed to reducing overheating in particular markets, notably with regard to credit expansion and the real estate market.

Directors generally agreed on the importance of wage restraint in controlling demand pressures. In this connection, most Directors emphasised the importance of restraining public sector wage increases, given the signalling effect on the private sector.

Directors noted the contributions which agreements among social partners had made to wage moderation in the past. However, a number of Directors considered that changes in the provisions of national pay agreements may be appropriate given the tightening of the labour market, and specifically that the authorities should be careful not to secure agreements at the price of procyclical tax reductions.

Directors encouraged more extensive use of performance-related pay provisions to foster greater relative wage flexibility and to reduce the risk of excessively high across-the-board wage increases.

Directors agreed that a number of issues for fiscal policy need to be considered in the immediate and medium term.

In light of current demand pressures, Directors were of the view that further net tax reductions should not be included in the 2000 budget. They also saw a need to place tax reform in a medium-term context and, in this regard, noted that tax rates could be reduced in a revenue-neutral manner if tax bases were increased.

Directors also emphasised the need for a fiscal plan to take realistic account of the need for infrastructure spending and its alternative sources of financing; of the declining level of net transfers from the EU; and of future pension commitments. Regarding the latter, Directors encouraged the authorities to seize the opportunity created by the present fiscal surpluses to fund public service and social welfare pensions.

They welcomed, in this regard, the authorities’ recent decision to make a sizeable annual set aside to partially fund the government’s future pension liabilities. Directors also welcomed progress in developing a multiyear budgetary framework, and encouraged the authorities to strengthen this framework further, particularly through the tightening of expenditure control mechanisms and the incorporation of the recently announced multiannual investment programme.

Directors commended the authorities for their active labour market policies, which have contributed to the significant reduction in the unemployment rate.

They noted, nonetheless, that challenges remained in tackling the high rate of long-term unemployment. Directors cautioned against setting the proposed minimum wage too high or indexing the minimum wage to earnings in order not to jeopardise efforts to reduce unemployment, particularly among the young and the long-term unemployed.

In light of the rapid growth in credit and strong housing price increases, a number of Directors expressed concern about the risks of an asset price bubble and the potential vulnerability of the banking system. Directors stressed the need to enhance the forward-looking aspects of regulatory policy and, in this regard, welcomed the supervisory authorities’ recent initiative to assess the financial system’s vulnerability to specified macroeconomic shocks. They felt that a peer review, particularly by supervisors from a country that had undergone a real estate boom, might be helpful.”