Banking & FinanceEconomyPolitics

Progress on EU-IMF deal

Mario-Draghieolas examines what the Government successfully concluded in Q3 of the EU-IMF programme and what is expected in the final quarter of 2011.

With the Government’s medium-term fiscal statement announced, five important fiscal documents remain to be published this year. On 10 November the Government will publish its capital review, followed by an expenditure reform plan one week later. This will include a medium-term expenditure framework and reform measures guided by the comprehensive review of expenditure.

The comprehensive review of expenditure and multi-annual expenditure ceilings for each department until the end of 2015, along with the estimates for December’s Budget, will be published on 1 December. The white paper on receipts and expenditure will be published on 2 December, and the Budget will be delivered by Michael Noonan on 6 December.

The Government has honoured its EU-IMF programme commitments for the third quarter of 2011, with the IMF stating: “Programme implementation continues to be strong.” It acknowledged the Government’s commitment to fiscal consolidation, that comprehensive financial sector reforms have been implemented, and that “structural reforms to support job creation and growth” are happening.

The Government must meet several fiscal, financial sector and structural reform targets by the end of the year.

While the fiscal commitments in the memorandum of understanding are expected to be amended to reflect the Government’s promises not to increase income tax or cut social welfare rates, the Budget is obliged to include:

• a reduction in private pension reliefs and general tax expenditures;

• a property tax (which will initially take the form of a household charge);

• reform of capital acquisitions and capital gains taxes; and

• an increase in carbon tax.

Financial sector obligations required by the end of Q4 include reporting on capital within banks covered by the prudential capital assessment review conducted in March, a progress update on deleveraging plans made under the prudential liquidity assessment review (also conducted in March), and reporting on progress in re-organising and strengthening supervision of credit institutions.

Two structural reforms must be advanced by the end of December: proposals for transferring responsibility for water service provision to a water utility, and the commencement of water charging by the end of 2013. There must also be progress on a reform programme “that can help better targeting of social support to those on lower incomes, and ensure that work pays for welfare recipients.”

The Government must make two fiscal reforms during this quarter. It must introduce a Fiscal Responsibility Bill, which will provide for a medium-term budgetary framework, fiscal rules and the establishment (on a statutory basis) of a fiscal advisory council (already established), and consideration of a “potential programme of asset disposals”.

The sale of state assets is an example of how the waters between Government policy and EU-IMF requirements have been muddied. The revised memorandum of understanding, concluded by the new Government in July 2011, committed to drafting a programme of assets for disposal, which would be discussed with the ‘troika’ authorities by the end of 2011. Crucially, it emanated from the Programme for Government commitment to sell €2 billion in state assets.

In the Dáil on 5 October Fianna Fáil finance spokesperson Michael McGrath told Michael Noonan he should stop blaming the previous government for the plan to sell state assets.

“I do not believe there is an issue of blame. I am in favour of and welcome the sale of State assets. There is no blame attached,” replied the Minister.

Less than two weeks later, the Taoiseach told the Dáil: “Under the IMF-EU deal, the Government is required to raise €2 billion in the Programme for Government from the sale of state assets at an appropriate time.”

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