Ireland’s fiscal position has improved and its public debt is declining, but the budget deficit remains too large and spending pressures are rising, the OECD has said in a new report.

The Paris-based Organisation for Economic Co-operation and Development (OECD) also warned that rising property prices pose risks to financial stability and called for more support for smaller firms and for steps to be taken to make sure everyone benefited from economic growth.

In an extensive study, the think-tank said determined policy efforts has boosted confidence and underpinned the “robust, broad-based recovery now underway in Ireland”.

“Unemployment is falling steadily, the budget deficit is declining, public debt has peaked and continues to fall and international credibility has been strengthened,” the OECD said.

It said the opportunity exists to resolve the legacies of the economic crisis, such as unemployment and the still-weak banking system, as well as to carry out structural reforms to ensure a sustained recovery.

It warned, however, productivity growth remains modest an while welfare transfers had narrowed income gaps, more action was need to get people back to work.

The OECD also called for a broadening of the tax base, accompanied by a lowering of high effective marginal tax rates on labour.

In terms of employment, the think tank said moves should be made to intensify activation policies to get people back into employment and to improve training.

It also said further steps to enforce welfare benefit recipients to seek a job or to take up training should be considered.

“Ireland has come a long way in the past five years since it entered the EU-IMF financial assistance programme. Determined reform efforts by the government, both under the auspices of the programme and subsequently, have paid off,” it said.

“Ireland has emerged from the crisis with a much reduced and still declining fiscal deficit, public debt on a downward path, a stronger fiscal framework, a more sustainable fiscal revenue base, a restructured and recapitalised banking sector, a strengthened and more efficient public administration, and a much improved labour market activation regime.”

The think-tank said while the economic situation had improved greatly in recent years, Ireland needs to keep improving its fiscal position to face the next downturn in the world economy.

It recommended increasing the structural fiscal balance by more than 0.5 per cent of GDP per annum, broadening the tax base by shifting the burden of taxation to immoveable assets, and reducing allowances for capital income and improving health spending efficiency.

The OECD said IDA Ireland should continue to target key foreign firms to Ireland, adding that a low and stable corporate tax rate remained important in terms of attracting investment.

SME sector lagging

It added, however, that while multinationals thrived during the downturn, the domestic SME sector lags behind with much lower levels of competitiveness, productivity and R&D spending.

It said strengthening competition in many sectors and further improving the regulatory environment for businesses and encouraging innovation should be policy priorities.

The OECD said innovation support should be rebalanced towards direct grants as public support for business research and development was skewed towards R&D tax credits. It also called for better use of international students by increasing post-graduation job search periods and exempting students from employment permit fees.

“Encouraging more innovation among new firms is a key lever for boosting productivity growth and jobs. In comparison with other countries, Ireland has fewer young patenting firms, less public spending on R&D, and less industry financed public R&D. Policy is going in the right direction to address these weaknesses but there is scope for improvement,” it said.

The think tank said skill mismatches remained high in the labour market. It called for efforts to develop and implement a more agile apprenticeship system to be stepped up.

It also said improved access and affordability of quality childcare, additional support for disadvantaged schools and upskilling of the long-term unemployed would help to make economic growth more inclusive.

Property prices

The organisation called for the acceleration through the courts of cases involving house repossessions and urged against home buyer subsidies and other measures to counteract rising rents and property prices.

“The government should avoid subsidies for first-time home buyers, as these will be capitalised into prices, aggravating a potential price spiral and making it even harder for those with lower incomes to purchase homes.

A more developed rental market would help moderate the property cycle, reduce household exposure to house price fluctuations, especially poorer ones that will be hardest hit if prices and rents continue to rise strongly,” the OECD said.