OECD Report On Ireland Contradicts EU's Critical Assessment

by Jason Gorringe, Tax-News.com, London

22 May 2001

The OECD yesterday issued a special report on the Irish economy which, far from criticising the government for the looseness of its fiscal policies as did the EU just a few months ago, says Ireland's economy is not at serious risk of overheating and can continue to grow strongly.

Finance Minister Charlie McCreevy welcomed the "many positive things" in the OECD report. As well as welcoming the OECD's findings Mr McCreevy repeated the government's mantra that the social partnership agreement with the unions was "the best way for this economy to remain competitive".

The report is likely to be used in Brussels by officials from the Department of Finance, who are asking EU finance ministers not to call on the Government to take action this year to offset the inflationary impact of the last Budget. The Irish Government wants the Commission to tone down the wording of its official recommendation when European Union finance ministers meet on June 5 to sign off on individual country assessments which included the reprimand for Dublin. Just two days later, on June 7, Ireland will hold a referendum to decide whether to ratify the EU's Nice Treaty. Ireland is the only EU member state to hold a referendum on the treaty.

The OECD report says that Irish fiscal policy, far from easing, may turn out to be "neutral or even tighter" as a result of the government's understating of its tax receipts, and that growth can remain close to 8 per cent this year and next and that living standards can continue to rise if policy is properly managed.

The OECD concedes that the budget "has taken greater risks than were advisable" given the tightness in labour markets and higher construction costs. But it also acknowledges "it would be politically difficult to continue to increase an already large surplus".

The OECD says there is no strong evidence to suggest that a speculative bubble exists in the housing market. It says "the risk of a hard landing should not be exaggerated". It also points out that despite the strong growth rates, there is no balance of payments problem emerging.

The OECD noted that the rate of inflation in the Republic was falling, but was likely to remain above the euro-zone average. This was because Ireland was a small open economy which was disproportionately affected by currency fluctuations.

It said that the forces driving economic growth in the Irish economy were firmly underpinned by favourable demographics and a high rate of technology-oriented investment. "The authorities have created a favourable business climate for growth and this policy will need to be refined as Ireland moves up the value-added chain."

It also advises the Government to continue to maintain a significant Exchequer surplus to "smooth tax pressures", citing the decision to set aside funding for future pension provision as a good example of what should be done.

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