Commission reiterates criticism of government's programme for stability

The upward movement in Ireland's inflation rate has come as no surprise to the European Commission whose own EU-wide spring economic forecasts, due to be published on April 11th, are likely to be revised upward by as much as a half-point because of the effect of oil prices.

A spokesman for the Economic Affairs Commissioner said the Commission stood by its view that prices, Irish included, would start to decline again mid-year and that the EU's overall rate would not rise beyond the ECB's upper limit for price stability of 2 per cent.

But the Commission also published a report yesterday on the implementation of the 1999 Broad Economic Policy Guidelines (BEPG), in which it reiterated recent criticism of Ireland's stability programme as inappropriate for an economy "showing signs of overheating".

"Despite the favourable fiscal position, doubts remain about the fiscal stance," the report says. It warns that "fiscal tightening is the only effective instrument for demand management. While fiscal tightening has occurred in 1999, the projections imply little thereafter. The 1999 budget actually lowered direct tax pressure that would be expected to alleviate, eventually, supply constraints as well as wage moderation. These are important considerations.

"Nevertheless, the sharp acceleration in wage growth in recent years and the current emergence of some constraints suggests that in line with the BEPG's recommendation, it might have been appropriate to postpone the December tax cuts to alleviate the excess demand pressures in the short term."

But the report does acknowledge that the Government has acted on the BEPG recommendation to restrain government consumption and it compliments the Government on the quality and durability of public spending. "In particular, despite the reservations noted about the fiscal stance, the budget measures to reduce labour market pressures, including income tax reform, are wholly appropriate given supply side constraints."

And the report notes that "national agreements between the Government and social partners represent a key context within which labour market reforms are progressed". It notes that the Irish employment rate has now matched the rate for the euro area, having risen by nine percentage points since 1993.

Although progress has been made in reducing long-term unemployment, the Commission says, "increasing female participation remains a focus for attention" and it notes that tax individualisation has been "somewhat weakened" by tax concessions to non-working spouses.

In relation to other sectors, the report notes the strong integration of the Irish economy into the single market with an intra-EU to GDP ratio second only to Belgium. But it warns that Ireland is poor at transposing EU legislation and "there is a need to strengthen competition policy".

Administrative burdens on SMEs "are among the least onerous in the EU", while private sector R&D is "relatively high". The latter is not true, however, for the Government.

The report notes the reform of the telecoms market, preparations for the liberalisation of gas and electricity, and the introduction of public-private partnerships for infrastructural investment.

It says that Irish capital markets are "developing well" and records a doubling of market capitalisation as a proportion of GDP in the last five years. It notes that the sell-off of state-owned banks should begin in 2000 and that the Government is expected to announce plans for a single regulatory authority "in the near future".