Difficult choices lie ahead if Government stays true to its goals

OECD ANALYSIS: How can the Cabinet develop a low-tax enterprise-friendly economy along with decent public services, asks Cliff Taylor, Economics Editor.

Now that the Celtic Tiger has sloped off, the question is how to position the economy for future growth. The message from the Organisation for Economic Co-Operation and Development (OECD) in Paris is that there is plenty for the Government to do - and none of it is the kind of work which Ministers like to find in their "in" basket.

The familiar refrain of underpinning competitiveness is played again by the OECD, in its latest report published yesterday. It hopes the economy here can recover in tandem with an international pick-up. But it warns that to do so, costs must be kept in line and expectations for spending and incomes moderated.

These tasks will become all the more important if the latest rise in the euro - which occurred after the report was written - continues.

A further slowdown in growth could put serious pressure on the Exchequer finances.

The OECD is reasonably optimistic that the new national agreement can help to bring down wage growth and that budgetary policy is moving back into line, after a period of inappropriate rapid spending growth.

However, it warns that the public pay benchmarking bill will severely limit room for budgetary manoeuvre.

Value for money in terms of better public services must be obtained, it warns, and the latest salvo from Mr McCreevy may be the first shot in the war to try to ensure that this is the case. However, the Minister knows the uphill task he faces. The latest CSO figures show that public sector numbers continued to rise strongly into this year and it will be no easy task to reverse this trend, as the Minister promised on Budget day.

The backdrop to this is, the OECD points out, the challenge of maintaining a relatively low- tax, enterprise-friendly economy, while at the same time providing decent public services. It suggests that the best way to try to square this circle is first to manage spending much better and second to examine ways of broadening the tax base.

However, the report concedes that "eventually it will be a matter of deciding how large the role of government should be in providing the services required by its citizens", a theme likely to lie behind forthcoming debates in areas such as the health service and infrastructure provision.

Figures in the OECD report show that current spending here as a percentage of GNP is half way between Boston and Berlin - higher than the US, but lower than the EU. As these figures generally relate to 1999, higher spending in the meantime means that spending here is moving towards OECD norms in key areas, but the question remains as to whether value is being obtained.

Broadening the tax base means finding new sources of revenue and thus trying to avoid pushing up mainstream income and corporation tax yields. For this reason, the OECD says third-level fees could be re-introduced, water charges should be brought in, as should some form of residential property tax.

In something of an understatement, the OECD declares that "it remains to be seen" how large the scope is for broadening the tax base "as it is often difficult to bring additional activities into the tax net". The recent debate on third-level fees demonstrates this. But the Government will know in its heart of hearts that it will have to look at some ways to raise new money to pay for services and the disadvantages of the other obvious course - pushing up indirect taxes and fuelling inflation - have been clearly evident this year.

The other side of the coin is getting better value for public spending and here also lies difficult political territory. Improving management of the public services is an area fraught with difficulty, as shown not only by experience here but also worldwide.

The debate over health spending is already well under way, but the Government's action plan is still awaited.

The OECD comes out in favour of a slimmed-down health board structure and points to the need for better accountability and management. But even though this is only the latest in a rising stack of reports making recommendations along these lines, it does not make it any easier for the Government to implement.

Likewise, the OECD call for much improved management of major investment projects also presents a considerable challenge.

And there are few quick votes in reforming the budgetary process and trying to tie public spending to outputs to users, thus moving away from the current annual bun-fight between departments about who gets what. Or in looking at the structure of agencies and boards in areas such as tourism, industry and fisheries and rationalising them.

However, the challenge facing the Government is to manage spending at a time when revenues are growing slowly. If it wants to stick to its goal of keeping overall tax levels low, while providing decent public services, difficult choices lie ahead.