The Government should postpone some infrastructure projects outlined in the National Development Plan in order to avoid fuelling inflation, the European Commission said yesterday.
And the Commission dismissed the most recent fall in headline inflation, arguing that underlying inflation was still rising.
The Commission yesterday published a report outlining how closely EU member-states implemented the Broad Economic Policy Guidelines during 2000. Despite the decision to reprimand Ireland over last December's budget, the Commission acknowledged that the report was less critical of Ireland than of many other member-states.
"The main problem we have with Irish policy is relating to the budget for 2001. Our assessment of how the policy was implemented in 2000 was not critical," said Mr Mervyn Jones, a Commission economist.
Mr Jones repeated the Commission's criticism of December's budget and denied that the latest inflation figures contradicted the view that the Irish economy was in danger of overheating.
"As the effects of oil prices and a weak euro exchange rate work themselves through, we can see headline inflation coming down throughout the euro zone. But the underlying inflation rate in Ireland is, if anything, continuing to rise. And with the policies being pursued by the Irish government, we see a risk of that getting worse," he said.
The Commission urged the Government to consider postponing some less-urgent capital projects envisaged in the National Development Plan but Mr Jones declined to say which projects should be delayed.
"There are significant needs in Ireland but there is also the problem of capacity. This is especially true of the construction industry. There is no point in pushing more demand into a sector that is already stretched. It is not for us to advise which programmes to cut back on," he said.
The Commission report praised Ireland's high budget surplus and falling public debt and said that the Government was making progress in liberalising product markets. But the report expressed doubt as to whether the traditional policy of rewarding wage restraint with tax cuts was still effective in a tight labour market.
The Commission's relatively positive tone towards Ireland contrasted with sharp criticism for other member-states. The report criticised Belgium's high level of public debt - 111 per cent of GDP compared with Ireland's 39 per cent - its low employment rate and lack of competition in some sectors.
Germany was chastised for its high unemployment rate, especially in the east of the country, and the high degree of regulation in the economy. Italy was told to control public spending and increase knowledge skills among its workforce.
Portugal, like Ireland, was criticised for failing to use budgetary policy to keep down inflation. Greece was told to cut unemployment, increase productivity and reduce the national debt. And the Commission told Spain to liberalise its labour market, reduce inflation and enhance the knowledge-based society.
