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News : Irish Last Updated: Dec 23, 2009 - 8:40:12 AM

OECD’s Economic Survey of Ireland: Lenihan says report should be "compulsory reading"; Warns about "false economic scientists"
By Michael Hennigan, Founder and Editor of Finfacts
Nov 4, 2009 - 4:57:46 PM

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The OECD’s Economic Survey of Ireland was launched in Dublin today by Angel Gurría, Secretary General of the Paris-based OECD, the Organisation for Economic Cooperation and Development - - the think tank for 30 mainly developed countries - - and the Minister for Finance, Brian Lenihan. The Minister welcomed what he termed the OECD’s fair and balanced assessment of the Irish economy and said it should be "compulsory reading" for understanding the challenges the country faces. The Minister warned about "false economic scientists" and told Finfacts at the launch press conference that he supported administrative transparency on public spending and cited the merit of publishing politicians' expenses.

Secretary General Angel Gurría, a former finance minister and foreign minister of Mexico, said Ireland cannot afford to go into another economic cycle, without the reform of property taxation. He said "government expenditure in recent years increased rapidly: spending was 50% higher in real terms last year than five years before."

Gurría said some of this was justified but, "this level of spending cannot be sustained and must now be adjusted."

He referred to the Bord Snip/McCarthy report recommendations and said Ireland "needs to make sure that it has first-class policies to help the unemployed back to work" and said unemployment benefits should be aligned with lower pay levels to avoid work becoming unattractive.

The OECD survey said weaknesses in the fiscal framework are partly responsible for the current situation and reforms would add to the credibility of the consolidation. Multi-annual plans for current spending should be made permanent and overall expenditure ceilings introduced. Consideration should be given to the creation of an independent body to advise on fiscal sustainability issues. Stronger budgetary institutions could help make policy more counter-cyclical. Consideration should be given to the publication of a complete balance sheet for the public sector in line with practice in some other countries.

The survey says the Central Bank should be given a more explicit macro-prudential mandate. The Financial Stability Report (FSR) should continue to be published annually. To ensure that the tensions identified in the FSR are addressed, consideration should be given to the development of more effective macro-prudential instruments. These could include an overall leverage ratio and either dynamic provisioning or counter-cyclical capital requirements, as well as tools regarding liquidity rules and risk management practices.

The OECD says the aftermath of this housing cycle should be a good time to deal with the poorly designed policies towards housing that contributed to the over-heating of the economy. The tax system is biased towards property, housing and homeownership. This leads to more expensive housing and greater volatility. A path towards the reduction of mortgage interest tax relief, beginning with new borrowers, should be set out. The introduction of a property tax would help to ensure that housing is adequately taxed, together with providing a tax base for funding local services. Policy to provide housing for those in need should be made more effective: more support should be provided through meeting the cost of accommodation in private housing rather than the construction or subsidised sale of public housing. The housing downturn may create good opportunities to use private housing to meet public needs.

The survey says the public sector has over-expanded and there is scope to increase efficiency. It says health spending can be reduced by cutting costs and redeploying manpower more effectively. The Medical Card scheme should be reviewed to ensure that it is meeting its objectives in the most efficient way. There is also scope for better value-for-money in education spending. Secondary-level class sizes could be raised without necessarily reducing the quality of education. Third-level tuition fees should be introduced, supported by a system of loans, to raise funding, improve incentives and make the system fairer.

The OECD says after the severe economic adjustment, Ireland’s potential output is likely to be permanently lower and recent developments call into question how much of the good performance over the most recent years was structural rather than cyclical. This underlines the importance of policy settings that promote sustainable long-run growth. Policies to boost competition in the sheltered services sector would make the economy more efficient in the long run, but would also contribute more immediately to reducing costs and improving international competitiveness. The effectiveness of competition law should be enhanced. Restrictions and barriers to competition should be removed in the electricity market, the retail sector, doctors, pharmacies, the licensed trade, the legal professions and bus transport. To increase retail competition, planning laws should be changed to remove barriers to entry and facilitate new types of store.

The report says on social partnership that one problem is that union coverage is unbalanced between the private and public sectors. These agreements therefore risk extending a public sector deal to the entire economy. It says this carries particular risks as productivity is difficult to assess in the public sector and therefore the bargained wage that results may not be closely linked to the factors relevant for the private sector. The OECD also says that this raises the question of whether the social partnership process remains useful in the present circumstances, particularly as regards wage setting.

Full Report: OECD Economic Surveys: Ireland 2009

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