DUBLIN: The IMF backed Ireland's calls for the European Commission to grant it some budget flexibility on Wednesday, saying the current fiscal rules do not reflect an Irish economic recovery "starting to fire on all cylinders".
After years of painful budget cuts to get its public finances under control, Ireland demanded more leeway this month for its budget spending next year, having seen the Commission show similar leniency to France and Italy.
Ireland has slashed its budget deficit from 12.6 percent of gross domestic product in 2011 to an expected 2.7 percent this year. Now it wants to be allowed to increase spending in line with its GDP growth rate next year rather than a lower, calculated average.
"In Ireland's case, the current EU methodology understates cyclical swings in unemployment, with implications for estimates of output gaps and potential growth," the International Monetary Fund said in a report on the Irish economy.
"Staff therefore welcomes ongoing work by the Irish authorities to refine some aspects of the EC methodology."
Under the EU's Stability and Growth Pact, euro zone countries must consolidate public finances until they reach balance or surplus.
The rules say that a government whose budget deficit is smaller than 3 percent of GDP but not yet in balance, as Ireland's is likely to be this year, cannot increase spending more than its medium-term potential GDP growth. This is meant to ensure a gradual strengthening of the underlying budget balance.
However, the Commission calculates this using a 10-year average which after the deep recession that preceded Ireland's international bailout puts the reference growth rate for the period 2014-16 at 0.7 percent, the IMF said.
That compares to growth of 4.8 percent last year - the fastest expansion in the European Union - and IMF estimates of 3.5 percent growth this year and a further 3 percent in 2016.
Refinements of the current EU methodology for estimating potential GDP for Ireland should therefore be developed and assessed to enable the fiscal rules to better serve their purpose, the IMF said.
Ireland was able to cut income tax rates and increase spending for the first time in seven years this year and has pledged to do so again in October's budget for 2016 ahead of parliamentary elections early next year.
The IMF recommended a phased and steady adjustment towards a balanced budget over the next three years and said that there was some flexibility to further ease the burden on higher income workers.
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