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Europe urges Ireland to look at all Budget options

September 19, 2012 Irish Independent
Commission joins chorus urging Government to broaden tax base and target welfare payments

THE European Commission joined the growing chorus of organisations urging the Government to consider "all options" when drawing up the 2013 Budget.

In its latest report for the troika, the commission said yesterday that Finance Minister Michael Noonan should consider targeting welfare payments and broaden the tax base to ensure that the poor do not suffer too much.

Last week, the International Monetary Fund and the Fiscal Advisory Council both urged the Government to reconsider promises not to increase income tax or cut welfare. The IMF said Mr Noonan should begin taxing child benefit and scrap perks such as free travel for the elderly because they help rich and poor alike.

The commission, which gave the green light for the release of another €1bn of funds for Ireland, warned that the economy faces many risks due to "fragile investor sentiment" and continued uncertainties in the outlook for growth.

"Significant challenges lie ahead for the Irish economy. These include the still large fiscal deficit, the country's high and increasingly long-term unemployment rate and the high private-sector debt overhang," the report warns.

It added that the banks' failure to make profits continues to endanger the country. Arrears and bad debts continue to rise while banks must pay over the odds for deposits, the report notes. "An overarching challenge continues to be presented by domestic banks' weak profitability," the report warns.

"Banks need to continue working on their restructuring plans and effectively implement their arrears resolution strategies,'' the commission urges.

The latest report came as the IMF effectively blamed the European partners in the troika for the failure to write off debts by burning bond holders.

"Institutional constraints in the euro area occasionally limited alternative policy options that could otherwise have been considered -- notably debt restructuring to strengthen debt sustainability," according to an IMF report, "particularly for bank debt in Ireland and sovereign debt in Greece."

The IMF admitted that its cooperation with European institutions over bailouts to Ireland and other countries often delayed decision making and sometimes meant some measures were not discussed.

The study complained that negotiations between the various bailout partners led to "a layer of complexity" in the design and monitoring of conditions attached to the loans.

The system, which has the ECB sit alongside the IMF to review implementation of the policies agreed, has been criticised by officials including Canadian Finance Minister Jim Flaherty, who has said he's worried that the fund's room to manoeuvre is constrained.


In past crises, including in Asia in the late 1990s, the IMF and central banks sat on opposite sides of the negotiating table.

A study by Bank of America said yesterday that the European sovereign debt crisis is no longer the top tail risk identified by investors, for the first time since April 2011.

The survey shows that the proportion of the panel who most fear EU sovereign risk fell to 33pc from 48pc in August and worries about the US fiscal cliff has become the biggest tail risk for 35pc of global investors.

For the first time since summer 2009, the survey has recorded three consecutive months of double-digit positive swings towards European equities.

It also reveals that 28pc of respondents believe corporate profits will deteriorate over the same period, up from a net 21pc a month ago.

Another 17pc of the global panel expects the world economy to strengthen in the coming 12 months, a rise of two percentage points since August, consolidating the strong gains in the previous month.