The International Monetary Fund (IMF) has issued a report following discussions with the Irish government under Article IV of the IMF’s articles of agreement. The IMF notes that Ireland has made a robust recovery with economic growth around 5% in 2014. The IMF considers that Ireland needs to implement a policy mix for fiscal adjustment to protect the potential for growth, with measures on both revenue and expenditure.

Although further fiscal adjustment is mainly driven by limiting expenditure, the IMF staff considered that Ireland will also have scope to raise more revenue. Revenue measures will be needed to rebuild Ireland’s capital spending. Ireland will also need to take further fiscal measures in response to the increasing international tax standards such as the OECD/G20 project on base erosion and profit shifting (BEPS).

Ireland formerly relied on a narrow tax base, especially on revenue from real estate transactions. The IMF considers that progress has been made in broadening the tax base and this progress needs to be protected in future. Tax revenues could be increased by broadening the value added tax (VAT) base without the need to raise the standard rate of VAT.

If housing valuations are brought up to date this will protect the property tax base and protect against fluctuations in tax revenue from fluctuations in the housing market. There is an opportunity to increase environmental taxes as a result of the drop in oil prices.

The Irish government considers that there could be a role for broadening the tax base but the priority is to address the high marginal rates of income tax. The government is also actively involved in the BEPS project and is following the development of international tax standards to ensure that the tax system complies with international practice.

The IMF notes that international measures on corporate taxation could make Ireland a less attractive destination for export-oriented foreign direct investment (FDI). The Irish government considers that the risks are limited in practice because Ireland has other competitive advantages and the low corporate tax rate is not affected by the international developments.