OECD criticises economic policy

The Government's stewardship of the economy was strongly criticised in a report yesterday by the Organisation for Economic Co-operation and Development (OECD).

But despite projecting marginally higher unemployment, the Paris-based think-tank said the pace of economic growth would accelerate this year in an examination seen as one of the strongest indications yet that the downturn since the foot-and-mouth crisis has ended.

Stating that the budget deficit was inappropriate, the OECD said public expenditure needed better management and warned the domestic inflation rate would remain well above the euro-zone average. Prices for domestic services were rising rapidly, it said.

On the first day of a General Election campaign in which economic policy will be a major issue, the OECD said GDP growth would accelerate strongly this year and reach 6.5 per cent in 2003. Yet because of a big negative carry-over from the slowdown in 2001, the growth rate this year would remain at about 3.25 per cent.

These projections were more than twice the expected euro-zone rates and the OECD said "it would seem advisable" for the European Central Bank to avoid increasing interest rates.

The organisation attributed the turnaround to public and private consumption and export growth, buoyed by the US-led global recovery. Business sentiment in nearly all the exporting sectors recovered towards the end of 2001 and orders were rising. Investment by firms would pick up also, it said, although unemployment would rise to a sustainable level.

With business leaders and senior trade unionists questioning the possibility of reaching a new social partnership agreement, the OECD said wage pressure remained strong despite the slowdown. "A key risk is that wage growth will not ease sufficiently and thereby dampen the recovery of exports and investment. Failure to control the expansion of the public sector would magnify such a risk."

But while the Taoiseach, Mr Ahern, claimed credit for the boom as he started Fianna Fáil's election campaign, the OECD said a "fundamental shift" in the Government's fiscal policy was incorrect. It said: "For an economy experiencing a temporary downturn, the shift in fiscal stance from sizeable structural surplus to small deficit has been inappropriately large and suggests weakness in the budgetary system. Current public expenditures need to be better managed to avoid the choice of either allowing further fiscal slippage or cutting infrastructure investment."

Fine Gael's finance spokesman, Mr Jim Mitchell, said: "The OECD's criciticism is right. That's understatement to say the least of it. In the past 18 months the Government has gone on a spending spree and has lost all control to the extent that it threatens the magnificent economic achievements brought about in the past 15-20 years."

A Department of Finance spokesman said the view of the Minister, Mr McCreevy, was that public money earned during the boom should be spent when the State had it.