Staff teams from the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) were in Dublin from October 11–20 for the regular quarterly review of the government’s economic programme. Policy discussions were concluded, with the exception of the specific fiscal measures to be included in Budget 2012, which are being determined by the government and will be assessed by the three institutions in the coming weeks. The EC and IMF are due to seek approval for the conclusion of their review from the European Council and the IMF Executive Board respectively, which will allow for the disbursement of EUR3.8bn by the IMF and EUR4.2bn by the European Union (EU).

The main features of the review are as follows:

• The review noted that the Irish government has completed the key initial phase of the comprehensive financial sector reforms launched in March. The fiscal deficit limit of 10.6% of GDP in 2011 is expected to be met and important structural reforms are being put in place. These strong policy efforts have underpinned the decline in Irish sovereign spreads in recent months, together with improved EU financing terms.
• The review says that, in a welcome sign of Ireland’s strengthened competitiveness, economic growth in the first half of 2011 was higher than expected. Nonetheless, the slowdown in key trading partners is likely to cool Ireland’s export growth. In addition, the reviewers expect domestic demand to contract slightly faster than was projected at the time of the previous review. Together, these factors will dampen the economic recovery, meaning that real GDP growth is now expected to be about 1% in both 2011 and 2012.
• The review recognised that the Irish authorities are firmly committed to fiscal consolidation to put the country’s debt on a downward path, by bringing the general government deficit to below 3% of GDP by 2015. The troika expects that the forthcoming 2012 Budget will make progress along that path by implementing sufficient consolidation to safely limit next year’s deficit to no more than 8.6% of GDP, striking a balance between debt reduction imperatives and limiting the drag on growth and job creation.
• To underscore their commitment to sound fiscal policy, the government intends to update the medium-term fiscal consolidation plan in the coming weeks, with the supporting measures to be provided with the 2012 Budget. These measures will be guided by the authorities’ Comprehensive Review of Expenditure, enabling savings to be made in a targeted manner rather than through across-the-board cuts.
• The troika welcomes the establishment of the Irish Fiscal Advisory Council and the release of its first fiscal assessment report.
• The key initial phase of the comprehensive financial sector reforms launched last March has been implemented. Recapitalisation of the banking sector has been completed at a lower than expected cost to the budget, benefiting from private investor participation and burden-sharing with the holders of subordinated bank debt. Deleveraging of the banking sector is progressing as planned, despite challenging conditions and banks have secured term funding reflecting improved confidence. Further progress in these areas is needed to allow banks to fulfil their essential role in the economy, the review says.
• The government is seen to be implementing structural reforms to support job creation and growth, with sectoral wage agreements being prepared, together with a strengthening of activation and training policies. Legislative changes are being introduced to enhance competition in the medical, legal and pharmacy sectors with the view to lowering costs.

Commenting on the results of the review, Finance Minister Michael Noonan said: “I am pleased that the mission has concluded that the Programme is on track and Ireland is making substantial progress in all the key areas. The restructuring of the banking sector has yielded significant savings on the capital to be invested by the taxpayer (from private sector investment and the liability management exercises) and it has also allowed Irish banks to access international money markets without the use of the guarantee. Furthermore, our tax revenues to date are slightly ahead of profile and we are set to outperform our budget deficit target, as set in the Programme, for 2011."

"This government has been very clear at all times that we are determined to take all the necessary steps to restore our sovereignty. As part of this the Government is committed to making the necessary level of budgetary adjustment in 2012 of at least EUR3.6bn to ensure that the 8.6% deficit of GDP target is achieved. My Department and the Department of Public Expenditure and Reform are currently assessing all the relevant information and I will shortly set out in the Medium-Term Fiscal Statement the size of the budgetary adjustment that is required over the years 2012-2015 in order to ensure that the General government deficit is below 3% of GDP by 2015. The relevant tax measures will be announced on Budget day but will be guided by the agreed Programme for Government”, Noonan added.

Brian Howlin, Minister for Public Expenditure and Reform, noted: “We have made significant progress since taking office; our expenditure for 2011 remains on track and since the last review we have also seen strong Q2 growth in the Irish economy. The consideration of the Estimates for 2012 is ongoing and the outcome will be presented by Government in our newly reformed budgetary process on 1st December. This new approach is a departure from previous budgets and is a more transparent approach to the budgetary process. The public sector pay bill is on target and I expect us to exceed our target for reduction in numbers in the public sector this year."

Both ministers concluded: “We welcome the fact that our programme is on track and the recent reductions in our interest rate have further improved our debt sustainability. The focus now is on delivering the required adjustment for Budget 2012. We will not shy away from the tough decisions that are required but we will make decisions in a fair and equitable way. Full details of this will be announced in line with the timetable set out.”

The mission for the next programme review is scheduled for January 2012.