Remarks by Angel Gurría, OECD Secretary-General
Dublin, 4 November 2009
Minister Lenihan, Ladies and Gentlemen:
It is a pleasure to be in Dublin to launch the 2009 OECD Economic Survey of Ireland.
Growth in the OECD area is resuming after the worst financial and economic crisis in decades. Some countries, including Ireland, have been hit very hard and the social impact, particularly on the jobs front, has been dramatic. The recovery in the OECD area so far is not only modest, but it is also very much policy-driven, reflecting the strong global response to the crisis over the past year. Much remains to be done in OECD economies to turn these early signs of improvement into self-sustaining growth. Ireland has already taken some major policy steps to get back on track.
Just over 15 years ago, this country began a period of economic growth virtually unprecedented in OECD countries. Based on open and market-oriented policies, good governance and steadfast social partnership, Ireland made the most of its membership in the European Union, fully benefitting from Structural Funds and access to the Single Market. A dynamic and flexible economy with an increasingly well-educated workforce attracted large flows of foreign investment. Employment rose and living standards increased by one-third in ten years. The country was in some respects a model of best practices. It was even dubbed the “Celtic Tiger”.
Today, Ireland is going through hard times. The global crisis and the end of a massive and unsustainable property boom have hit the economy very hard. The economic contraction will be large by historical and international comparisons: the peak-to-trough contraction in real GNP is likely to be close to 13%. Recent news about the Irish economy has been more encouraging and, as a very open economy, Ireland should be able to benefit from the strengthening international economy. However, Ireland’s own recovery will only begin well into 2010 and it looks like it will be relatively weak.
This 2009 OECD Economic Survey is about how Ireland puts itself on the road to recovery. Policy adjustment in Ireland has already begun and indeed is well-advanced compared with some other countries. The immediate priority was to stabilise the banking system. NAMA is designed to restore the banking system to health by cleaning up their balance sheets. Efforts should now concentrate on ensuring that NAMA implements its mandate fully to allow the banks to lend again and to protect Irish taxpayers.
More generally, if the right policy decisions continue to be taken, Ireland will be on the path to a more sustainable and ultimately stronger economy.
Let me introduce vey briefly the main messages of the Survey. The study highlights three challenges.
1. Rebuilding the public finances
First, the need to repair public finances. Following many years of budget surplus, the fiscal balance swung dramatically into deficit to reach over 8% of GDP in 2008. This has helped to support the real economy but did not leave any room for discretionary fiscal expansion in the aftermath of the crisis.
The deficit has continued to worsen this year. Tax revenues have collapsed: current receipts are 16% lower this year than last despite tax increases. With higher unemployment, social spending is inevitably also on the rise. From a low starting position, public debt is rising at fast pace.
The government has taken several necessary and courageous measures to stabilise the public finances: fiscal consolidation amounting to around 5% of GDP has already been undertaken. But, the deficit will remain high. Substantial fiscal consolidation remains necessary in the forthcoming budget and over subsequent years. The government should stick to the budgetary plans it has outlined. This will require hard choices.
Measures have been taken to raise revenues. The Income levy does this in an efficient and progressive way. However, there remains scope to do more to broaden the tax base. The Commission on Taxation has set out useful proposals.
During the property boom, OECD Economic Surveys warned of the risks from the bias in the Irish tax system in favour of home ownership. Ireland cannot afford to go into another economic cycle without a reform of property taxation. Property taxes are an efficient way of raising revenue and the Commission on Taxation has recommended their introduction.
Government expenditure in recent years increased rapidly: spending was 50% higher in real terms last year than five years before. Some of this was justified as public services adjusted to the needs of a larger and more affluent population. High public investment contributed to a much needed upgrading of the infrastructure. But, this level of spending cannot be sustained and must now be adjusted.
This is a delicate manoeuvre. Adjustment must be carefully planned and targeted to preserve services to the public and ensure that the most vulnerable in society are supported. The Special Group on public spending, known as An Bord Snip, has identified a wide range of possible actions, calling for steps to raise public sector efficiency.
The required reductions in government spending are an opportunity to reform and modernise public services to make them more efficient and responsive to citizens. The OECD’s 2008 review “Towards An Integrated Public Service” recommended increasing the focus on performance, stronger budgetary frameworks, cutting the number of agencies, increasing flexibility of staffing, and better use of e-government. You can count on the OECD’s support to move forward in these crucial lines of action.
2. Getting people into work
The second big and urgent challenge is tackling unemployment and getting people into work. More than 12% of the workforce is now out of work, up from just 4.5% two years ago. We understand the strain this puts on families and local communities. Labour demand is weak and joblessness will unfortunately remain high in the short run, even with strong outward migration.
The Irish labour market benefits from being very flexible and this has again been demonstrated in this downturn. But, unless the right targeted policies are put in place to help people back into work, the risk is that unemployment will remain very high for a long time, even as economic activity begins to recover.
As the Survey shows, unemployment insurance benefits for low-skilled people in Ireland can be high by international comparison, making it less attractive to look for work. At the same time, OECD analysis has shown that Ireland’s activation policies to help the unemployed return to work are less demanding than in other countries, with less frequent contact expected with employment services.
More than ever, Ireland needs to make sure that it has first-class policies to help unemployed people back into jobs. Along with reassessing benefit payments, this requires more effective activation measures. As international best practices show, the objective has to be to encourage people to stay connected to the labour market. This is particularly important for young people and other vulnerable groups.
Specifically, the Survey recommends creating a single agency dealing with the unemployed, both ensuring they get the right benefits and encouraging them to find work or learn new skills through training. Most OECD countries have already moved to this model. Some existing and costly labour market programmes, such as Community Employment, will need to be scaled back. Disability benefits should be reformed to make sure that they do not encourage older workers, who could still work, to drop out of the labour market. Taken together, these reforms would help to reduce unemployment as the economy picks up.
3. Boosting competitiveness
The third challenge that we highlight is the need to restore international competitiveness. Ireland has been a favoured destination for foreign investors. But, Irish costs have risen fast in the past decade, putting the economy at a competitive disadvantage. Wages and prices need to fall back to boost Ireland’s exports as the world economy recovers and to move away from over-reliance on domestic demand.
Prices are already falling, and by more than the average for the euro area: the harmonized index of consumer prices fell by 3% in September from a year ago. There is also evidence of a reduction in nominal wages. This shows a remarkable degree of flexibility by international standards, both in the private and public sectors, although the effects on indebtedness will need to be handled carefully.
Prices in sheltered services are high by international comparison because of weak competition among firms and providers. These include important sectors like retail, the legal profession, pharmacies, doctors and pubs, in addition to the network industries. The Survey recommends removing unnecessarily restrictive regulations, strengthening competition policy and changes to planning laws. Greater competition will mean lower prices for consumers and businesses, as well as reinforcing Ireland’s attractiveness to foreign investment.
Ladies and gentlemen,
The Irish experience from the mid-1990s has been remarkable. The gains in living standards from a dynamic, flexible and highly-skilled economy will be sustained in the long run, despite the current downturn. While Ireland’s high growth rates of the late 1990s are unlikely to be repeated, taking the right determined decisions today will help to ensure that this recovery gathers momentum and leads to a more sustainable and stronger economy in the future. The authorities have already taken big steps, but further efforts will be required in the coming months and years.
We very much hope that this Survey can contribute to your efforts to achieve a full economic recovery and give Ireland the bright, innovative and confident future it deserves .
Thank you very much.
OECD Secretary-General visit to Ireland (Dublin, 4 November)