SURVEY:WHILE THE OECD secretariat draft their reports, the process is a peer-review one and the final survey reflects the joint conclusions of all 30 OECD countries. Occasionally, the published version is less hard-hitting than the secretariat might wish but that is hardly the case with this one, writes PAT McARDLE

The OECD’s analysis is excellent, but their forecasting track record is no better than anyone else’s. For example, their 2006 survey concluded that while house prices might have overshot to some extent, the most likely scenario was “that prices will level out or decline slightly, housing construction will fall back gradually and the market will remain subdued for some time”.

They were more critical of the fiscal policy stance but were still well off the mark, concluding that a prudent approach would involve “returning to balance or running a small surplus”. They have since revised their figures to show that a massive surplus would have been appropriate.

That said, the 2009 survey is probably the best analysis of the Irish situation yet seen. These sentiments were echoed by Brian Lenihan, who described it as a good, realistic, sober document, full of common sense and compulsory reading for anyone who wants to make informed comment on the current situation.

The recommendations are unambiguous. The Government should stick to the budgetary plans it has outlined, even if this will require hard choices. To date, action taken amounts to 5 per cent of GDP; there is another 9 per cent to come, with a third of that slated for the 2010 budget. Unlike the ESRI, the OECD think the deterioration in the budget deficit has been largely structural: ie, it will not disappear as the economy recovers.

OECD secretary general Angel Gurria had an unpalatable message for the trade unions, noting that the markets demand a clear path and can be harsh judges if they perceive any procrastination. If confidence deteriorates, borrowing costs can rise as spreads are marked up.

The tax advice mirrors that of the Commission on Taxation, but without the rider that tax increases should be balanced by reductions elsewhere. This means broadening the income tax base by eliminating reliefs and reducing tax credits, integrating the levies into the main rate structure and introducing both carbon and property taxes. There is no reference to PRSI. Lenihan clearly wants to limit any tax increases in the next budget. The message from the OECD is that they are unavoidable, if not next year, then the year after.

The public sector has overexpanded and must be cut back. Pay should be reviewed independently, taking account of falling private-sector wages. One of the strangest omissions over the past year has been the failure to re-run benchmarking on a proper basis. Though they do not say so explicitly, it is clear the OECD believe that public sector pay has more to fall. Public service numbers, too, must fall.

There is scope to cut resources in the health sector, second-level class ratios should be increased, tuition fees introduced and welfare payments reduced at least in line with prices. Benefits should be taxed. Capital spending should be spared as much as possible, but should fall.

After the budget, the second major task is to get people back to work. There is a danger of institutionalised unemployment among the less skilled and recently qualified so particular attention needs to be paid to reskilling and ensuring that social welfare payments do not act as a disincentive to work. Our activation policies are weak – code for “we do not do enough to get people off social welfare”.

The third challenge is to boost competitiveness. In what is described as a “remarkable degree of flexibility by international standards”, wages and prices are already falling. The OECD expect nominal wages to fall by around 5 per cent but stop short of saying that this is insufficient in the face of competitiveness losses of 20 per cent or more. It appears that even they are daunted by the scale of the challenge that faces us.

The OECD stress how important it is that Nama is independent from political and industry pressures, highlight the drawbacks of nationalisation, even on a temporary basis, and stress the need for an exit strategy, the first time that I have seen this mentioned.

Finally, the regulatory authorities come in for the most explicit criticism yet seen. The OECD call for a more intrusive regulatory regime, including a shift towards a rules-based approach, notwithstanding that this system failed in the US where the subprime issue arose.

Key Recommendations

• The tax system should be reformed to prevent a housing bubble. This should include a property tax and the reduction of mortgage interest relief.
• Third-level tuition fees should be introduced and supported by a system of loans, in order to raise funding and make the system fairer.
• Unemployment benefit claimants should eventually be required to enter work programmes, while lone parents should be required to seek work once their children reach school age.
• Nama should be swiftly implemented, banking regulation should be strengthened, and enhanced rules should include a requirement for banks to hold more capital.
• The level of the minimum wage should be reassessed as it is high by international standards. It should then be reviewed on an annual basis.
• Water charges must be introduced if we are to meet our commitments on water quality and conservation.
• A cut in teachers' salaries would bring us in line with our European neighbours.
• Future infrastructure projects, such as those in Transport 21, should be rigorously re-evaluated.