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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic Survey of Ireland, published on 4 November 2009.
The Irish economy plunged into a severe recession in 2008, following a period of unsustainable growth. Housing investment has slumped and large internal economic imbalances are unwinding, with the effect on demand compounded by the international financial crisis and global slowdown. The adjustment, which is underway, will be prolonged and the economic recovery weak. Irish banks have come under severe pressure, and major support from the government has been required. The downturn has revealed a weak underlying fiscal position. The authorities have already taken important steps to restore stability, but more will need to be done.
Unwinding macroeconomic imbalances. Housing investment has more than halved and house prices are falling, and more retrenchment is likely. Lower household wealth, high debt and rising taxes exert a drag on household spending. International competitiveness needs to be restored, and prices and nominal wages are already falling. In addition, rebalancing the economy will require relative price changes, including lower real wages and lower unit labour costs.
Restoring financial stability. The priority is to return the banking sector to good health. The National Asset Management Agency should be implemented with assets purchased at the appropriate price with risk-sharing mechanisms to protect the taxpayer. Further recapitalisation may be necessary, which could involve greater public ownership. Strengthening banking regulation and supervision is needed to reduce the risk of future new financial tensions. More effective macro prudential policy instruments should be developed. Reform of the taxation of housing would limit future housing cycles.
Securing fiscal sustainability. There is a large underlying mismatch between tax revenues, which have shrunk with the collapsing property market, and the level of expenditure. It is appropriate that fiscal consolidation has already begun and very substantial further measures will be required, although there is a balance to be struck with the negative effects on economic activity. This should take place within a credible multi year framework as the authorities have outlined. Restoring the budget to a sustainable path will require both increases in revenues and cuts in public expenditure. Tax rates have increased and the tax base should now be broadened by reducing inefficient tax expenditures, introducing a property tax and making more people pay income tax. Further reductions in the overall level of government expenditure will also be required. The public sector pay bill should be further curtailed and benefit payments should be reduced at least in line with falling prices. There is scope for efficiency improving measures, focusing on improving value for money and modernising the public service.
Avoiding long term unemployment. Labour market regulations are flexible in many respects. Reductions in nominal and real wages appear to be taking place. Nonetheless, there is a risk that unemployment rates will remain high over time because there are weaknesses in activation policies and unemployment replacement rates are rising. This has a particular impact on the low skilled and in this context consideration should be given to reducing the minimum wage over time. A more streamlined benefit system and greater focus on activation should help those groups with low labour market attachment historically.
Achieving sustainable long run growth. Living standards are likely to be permanently lower as the result of the unwinding of economic imbalances, which built up during the recent period of unsustainable activity. Hence, structural policies that encourage sustainable growth for the long run are of even greater importance. Competition in the domestic sheltered services sector should be increased, which will help to improve competitiveness in the near term. Although public resources are limited, continuing to upgrade the infrastructure and raising human capital remain a priority where the benefits can be clearly established.
How to obtain this publication
The complete edition of the Economic Survey of Ireland is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Ireland Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Sebastian Barnes under the supervision of Patrick Lenain. Research assistance was provided by Annette Panzera and Joseph Chien.