Study urges public wage restraint

Economics:Ireland's economy is at risk of a severe correction unless the Government develops new economic policies, a study of the economy concluded yesterday.

Rising wages since 2004 have damaged the economy's competitiveness, according to Dr Julia Traistaru-Siedschlag, a senior research officer at the Economic and Social Research Institute, in a report called Macroeconomic Adjustment in Ireland Under the EMU.

The report blames rising inflation and calls on the Government to tackle this by lowering the rate of public spending growth through public sector wage restraint.

It also warns that Ireland's share of exports destined for countries outside the euro zone (74 per cent) is higher than in any other euro zone country, and adds that Ireland's economy is now more at risk from a global economic downturn than any other euro zone economy.

"To restore equilibrium in the economy, a temporary fiscal contraction to reduce domestic demand pressures may be necessary. To achieve this objective one option that can be considered is a restrain of wages in the public sector."

It recommends reducing the economy's dependence on the property market, and calls for the introduction of a tax on second dwellings and the abolition of mortgage interest relief.

In the last budget mortgage interest relief was doubled for those purchasing property in the last seven years.

The study blames inflation and rising house prices on high rates of borrowing, and recommends limits on using property as collateral for borrowing.

It says the trend has been exacerbated by rising inflation which has caused real interest rates to fall. Real interest rates measure the difference between the rate of interest and the rate of inflation, and aim to measure more accurately the extent to which standard interest rates encourage borrowing.

"In the long run productivity growth is key to maintaining a high-potential output growth," Dr Traistaru Siedschlag said yesterday.

She added that competitiveness could be restored by keeping rates of wage growth in Ireland below those prevailing in economies that compete with Ireland.

Euroframe - a group of leading economic institutes including the ESRI - yesterday predicted that a downturn in the US would not affect the euro zone economy, but added that Ireland's was more exposed to the US economy.

Euroframe forecasts are published regularly by a network of 10 European research institutes.