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IMF says tax increases should be considered post Covid

The IMF says a gradual increase in tax revenue should be considered once a recovery from Covid-19 has taken hold

In a review of the Irish economy, the IMF says a gradual increase in tax revenue should be considered after next year, once a recovery from Covid-19 has taken hold.

It has welcomed the establishment of the Commission on Taxation and Welfare and says the tax base needs to be broadened.

In today’s review, the IMF says more money needs to be spent on education, vocational training, reducing the cost of childcare and the provision of social and affordable housing.

It says this needs to be done to retain Ireland’s advantages as a location for foreign direct investment and to minimise any long term affects from the disproportionate impact Covid had on the domestic economy.

It describes the impact of Covid on the economy as “highly asymmetric” with strong growth from the multinational dominated manufacturing and computer services sectors “softening the blow” to the rest of the economy.

It warns that a two-speed recovery remains likely.

The IMF also warns in an “extreme scenario” the introduction of an international minimum corporate tax rate could see half of Ireland’s corporate tax receipts wiped out.

This would be equal to approximately €5 billion and would be on top of the €2 billion hit the Government has already factored into its forecasts for the next five years.

The Fund says that while still “significant”, this would only delay the recovery in Ireland’s public finances.

It cautions that this is not a prediction of what will emerge from discussions on international tax reform.

The IMF also believes that Covid income and business supports should not be withdrawn prematurely but will have to be withdrawn ‘at some point’.

When that happens, it says income support measures should “become increasingly conditional on re-skilling” and “subsidising new hiring in the expanding sectors”.

It says business supports should also be increasingly targeted to “affected but viable firms.”

Addressing the shortage of affordable housing requires a “multi-pronged” approach, the IMF says.

It recommends that more land be released for development and that the process for re-zoning and approvals be made more streamlined.

The role of investment funds needs to be balanced by making sure affordable housing is being provided, the IMF adds.

Both Finance Minister Paschal Donohoe and Public Expenditure and Reform Minister Michael McGrath welcomed today’s IMF review.

They said that as noted by the IMF, Ireland is the only EU country with positive GDP growth, but added that many challenges remain as Ireland begins to emerge from the pandemic.

Ministers Paschal Donohoe and Michael McGrath

These challenges include post-Brexit trade arrangements, potential changes in international taxation, reducing the country’s deficit and national debt, getting people back to work and assisting those who need to reskill.

The Ministers said that all of these will be addressed against the planning for a careful and considered withdrawal of the pandemic support measures – when appropriate.

Paschal Donohoe said that the worst of the pandemic now appears to be behind the country.

“Our vaccination programme is progressing well and this will allow for further easing of restrictions over the summer. This should drive a rapid economic rebound in the months ahead, with consumer spending leading the way,” Mr Donohoe said.

“Government will continue to support households and firms, and this support will evolve as the situation progresses; they will be more tailored and more targeted to those workers most in need and to viable, but vulnerable, firms,” he added.

But beyond the immediate recovery, the Minister said we must now start to think about addressing the longer-term structural issues within the economy, including Ireland’s ageing population.

“While currently quite favourable, the demographic structure of our population is set to change significantly over the coming decades,” he stated.

“We must also consider issues such as the financing of Ireland’s transition away from fossil fuels to a low carbon economy. The scale of the climate change challenge is very significant and will involve transformative change for all sectors of the economy,” he added.

Michael McGrath said that with the economy starting to reopen as the vaccine rollout continues, Government is committed to supporting society and the economy to recover from the impact of the pandemic.

“As the IMF notes, this will require that the unwinding of support measures be tapered and gradual to avoid a cliff-edge,” he said.

He said that key requirements for an inclusive and sustainable recovery noted by the IMF, including upskilling and investment, are priorities for Government.

“The Government’s focus on upskilling will allow us to address the challenge that as we emerge from the pandemic, many of the jobs of the future will be different,” he added.


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