Living standards in Ireland are likely to remain “permanently lower”, the Organisation for Economic Co-operation and Development (OECD) said yesterday in a new report on Ireland.
Lower wages are necessary to restore stability to the economy, the organisation said, while consideration should be given to reducing the minimum wage over time.
Jobseeker’s benefit and assistance payments should also be cut in line with falling prices, according to the OECD’s survey of the economy.
A property tax should be introduced to prevent future property bubbles, while third-level tuition fees should be introduced, supported by a system of loans, it recommends.
The OECD, to which 30 of the world’s developed economies belong, puts forward its view of how the Irish economy can be restored to long-term sustainable growth after a period of “unusually large” economic unbalances.
“The necessary fiscal consolidation, which has begun, should proceed, although there is a balance to be struck with economic activity,” it said. But the ongoing correction in the economy will be “prolonged” and economic activity will not return to boom levels, it added.
The OECD’s report was published on a day in which the Live Register of unemployment benefit claimants fell for the first time in 2½ years.
However, the Opposition, economists and business groups said the fall in the number of claimants was the result of a pick-up in emigration rather than the return of better conditions in the labour market.
The 3,000 fewer claimants in October compared to September eases some of the short-term pressure on the public finances.
But there was more bad news for the Government yesterday as the cost of borrowing by the State increased slightly after credit ratings agency Fitch downgraded the rating on Ireland’s sovereign debt from “AA+” to “AA-”.
“The breadth and depth of the country’s banking sector problems have substantially increased sovereign risk,” said Chris Pryce, director of Fitch. The downgrade puts Ireland’s rating on the same level as Italy and Cyprus.
Minister for Finance Brian Lenihan said the ratings downgrade underlined the importance of taking appropriate action.
“It is extraordinary that the European Commission, the OECD, the IMF all have said there is a clear way out for Ireland and that is to resolve our banking crisis, address our public finances and restore our competitiveness,” Mr Lenihan said.
Among its recommendations, the OECD said public sector wages should be independently reviewed and public sector pensions “overhauled in the light of private sector arrangements”.
The report is in favour of means-testing social welfare benefits that do not currently relate to household income, such as child benefit. Social welfare benefits should be subject to income tax, it adds.
On tax, the OECD said personal allowances should be cut in order to widen the tax base.
Tax reliefs should be limited to the standard rate of tax and capped, while some reliefs should be eliminated.
The Government should consider introducing full individualisation in the tax system, which would entail the abolition of higher standard rate bands for single-income married couples, in order to encourage the participation of women in the labour force.
However, it was not in favour of any increase in indirect tax, such as VAT and excise, saying there was “little scope” to pursue such policies.
As the Irish tax system is biased in favour of home ownership, which leads to more expensive housing and greater volatility, steps should be taken to eliminate this bias, it said.
Mortgage interest tax relief should be reduced, beginning with future borrowers, while a property tax should be used to fund local services, the OECD said, echoing recent recommendations of the Commission on Taxation.
Private housing should be used for people in need of homes and support for people who have lost their jobs to meet mortgage payments “should be made more effective”.
“The aftermath of this housing cycle should be a good time to deal with the poorly designed policies towards housing that contributed to the overheating of the economy,” it states.
Barriers to competition in the electricity market, retail sector, pharmacy sector, licensed trade, the legal professions, bus transport sector and medical professions should be removed, it urges.
