Economic reports warn of threat from wage rises

Spiralling wage growth must be stemmed immediately if the Republic's economy is to remain competitive, two major economic commentators have warned, writes Una McCaffrey

Spiralling wage growth must be stemmed immediately if the Republic's economy is to remain competitive, two major economic commentators have warned.

In reports issued yesterday, both the Organisation for the Economic Co-operation and Development (OECD) and the National Competitiveness Council (NCC) highlighted wage inflation as a serious threat to future competitiveness and economic expansion.

The warnings come as EU data show average Irish wages to have risen 3.6 per cent above the euro-zone average in 2001.

By 2003, the Republic's workers are set to be paid 13 per cent more than their average euro-zone colleagues.

"We've had a very rapid and severe deterioration in terms of Ireland's labour market competitiveness," said Mr William Burgess, chairman of the NCC.

The NCC, which was established under the Programme for Prosperity and Fairness (PPF) to advise Government on economic issues, is pushing for a return to a "virtuous circle" of modest wage growth, low inflation, productivity gains, social partnership and a competitive business environment.

"While we're not in disasterville as a country, we certainly have no room for complacency," said Mr Burgess.

Meanwhile, the OECD has cut its 2003 growth forecasts for the Republic from 6.5 per cent to 3.6 per cent in gross domestic product. The Paris-based think tank is expecting that growth will improve gradually, reaching 4.5 per cent in 2004 as private consumption and investment strengthen.

Weighing against this already gloomy scenario is wage inflation, however, which the OECD believes could "lead to a further loss of competitiveness and slower growth".

Both reports take on a greater resonance when viewed in the context of discussions on a successor to the PPF.

The NCC, which includes both employers and unions on its council, recommends that wage growth "must be related to the ability of the enterprise to absorb the costs without damaging the competitiveness position of the economy".

The Council is particularly concerned about the creation of a "price-wage spiral".

"Costs and prices in this country are as high as we can afford them to be and the rate of increase in both is higher than we can afford into the future," said Forfás chief executive, Mr Martin Cronin, who sits on the council.

The NCC notes, however, that wage growth may be slowing in line with general economic conditions, particularly in the services and construction sectors.

On benchmarking, the council's report argues public-sector employment growth must be coupled with improved delivery of policy, regulation and infrastructure. Awards arising from the benchmarking process must be "managed in a manner that reflects the changed fiscal circumstances", the report advises.

The OECD also recommends that public-sector pay awards should only be granted against "commitments to improve work practices".

Addressing journalists on the NCC report, Mr Cronin raised concerns about the current rate of infrastructural development.

The NCC is pushing for the National Development Plan to be "re-prioritised" to reflect current economic realities. Efforts should now be focused on developing major routes between large urban centres and on deploying broadband infrastructure throughout the State, according to Mr Cronin. "Ireland has fallen behind at the start of that [broadband\] race," he said. "We can't let that gap widen."

The NCC called for the establishment of a unit within An Bord Pleanála to deal with "fast-track planning" on issues of national interest.Employers' body, IBEC, which is also represented on the NCC, described the competitiveness report as "a major wake-up call".