Tax cuts in the coming Budget must be limited and spending held in check, the Organisation for Economic Co-operation and Development (OECD) warned yesterday.
In its draft annual Economic Review and Outlook, the Paris-based think-tank said the Minister for Finance must avoid overheating the economy and should limit any tax cuts in the Budget to "what is required to retain the consensus-based approach to wage formation".
But the organisation also forecast that, for the third year, Ireland's economy will remain the fastest-growing among OECD members in 1998, before growth begins to taper off next year.
The organisation said efforts to hold Government spending to budgeted levels must be maintained in next month's Budget.
The Minister has so far kept under his 4 per cent limit for increasing spending and, if in excess of £100 million in savings materialises as expected, he will not break that limit in the Budget. However, he is expected to spend about £400 million in tax cuts, despite words of caution from bodies such as the OECD and the European Commission.
Referring to Mr McCreevy's likely £1 billion-plus budgetary surplus next year, the OECD says: "The rapid decline in public investment must not be taken as a sign of room for manoeuvre on the fiscal, or taxation, front, as it is unlikely the economy can sustain recent high growth levels."
The organisation has forecast that the economy will weaken quickly next year as inward investment falls off and exports slow down. It predicts growth rates of 5.6 per cent in Gross National Product in 1999 compared with 7.6 per cent this year and 8.1 per cent last year. At the same time, it predicts unemployment will fall to 8.4 per cent in 1999 and 7.9 per cent in 2000 from 9.1 per cent this year.
The one black-spot is inflation, which is running at 2.9 per cent at the end of October, according to figures issued by the Central Statistics Office yesterday. This is down 0.1 of a point from the end of September.
The fall is mostly due to the rise in the value of the pound against sterling from lows of about 82p to about 90p. While this fall is likely to continue and the fall in mortgage rates has yet to feed through to inflationary figures, the OECD points out that there is little reason to expect a slowdown in domestic demand.
The continuing shortage of labour and employment increases means that any fall-off in private-sector consumption is likely to be quite gradual. At the same time export growth is likely to fall back to low levels in comparison with the explosive gains of recent years.
The fall in inflation announced by the CSO yesterday was in line with expectations and was mostly due to a decline in the price of fresh fruit, vegetables and motor fuel. Upward pressure was mainly due to rises in the cost of education and training as well as turf and coal.
The fall in the cost of mortgages because of reducing interest rates will begin to feed through in the data for the end of November and, according to some analysts, will take as much as 0.7 of a percentage point off the index.
Overall, according to Mr Alan McQuaid, of Bloxham Stockbrokers, inflation can be expected to average 2 per cent this year, and the EU Commission's recent forecast of 3.3 per cent is now practically proven to be too pessimistic.
According to Mr Jim Power, chief economist at Bank of Ireland, inflation can be expected to continue to improve next year, as sterling falls back, and will probably average 2.5 per cent. He pointed out that the fall in food prices, clothing and footwear, as well as in durable household goods, was due to the sterling factor.