The OECD has warned that Ireland’s high debt makes the State vulnerable to shock but it has tacitly backed the Government’s plan to expand the budget by up to €1.5 billion.
Ángel Gurría, secretary general of the Organisation for Economic Cooperation and Development, said fiscal policy was going in the right direction.
Noting that the Government plans to bring the budget deficit to between 1 and 2 per cent of GDP next year, he described the current plan as a “prudently” expansionary step. “We’re not losing any sleep over it,” he told reporters at Government Buildings.
“It’s manageable within that scope of things where you don’t get carried away with enthusiasm but you remain very, very level-headed and always remember where you were not too long ago,” he said.
He was speaking after publishing the OECD’s biennial assessment of the Irish economy in which it saluted the return of growth but warned the rising property prices could lead to another bust.
Welcoming new Central Bank mortgage caps, the OCED said such measures should be closely monitored. House prices have increased strongly since 2013 and said commercial property prices were climbing sharply, it noted.
‘Eventual burst’
“Such strong prices rises may again spark a reinforcing spiral of higher property prices and credit leading to another misalignment of property prices and eventual burst that causes large losses to the banking sector,” the report stated.
On mortgage arrears, the OECD report called for continued action to accelerate the court process for repossessions and said further measures may be required to tackle non-performing loans and allocate losses.
Mr Gurría’s overall assessment was positive but he did warn that the level of the national debt was still too high. “From 2008 to 2014 there’s been a rather massive consolidation of about 17 per cent of GDP. This is quite unprecedented.
“When you come from the outside when you’re comparing it to all the other countries it’s really a rather massive effort.”
At the same time, a debt level around 100 per cent of GDP meant the Government had to drive hard to reinforce the public finances.
“The markets have very little tolerance and, also, because the rating agencies got it so wrong in the past and the banks got it so wrong, now they overcorrect . . .
“Effectively a country like Ireland is more vulnerable: small, open, part of a consortia where you don’t deal with your monetary policy but that is negotiated and where your trade rules and your investment rules and everything is part of a collective, then the only thing you can do is steel yourself,” he said.
Normalisation
The benefit of very low interest rates might not continue, he added. Saying normalisation would return at some future point, he said a one percentage point interest rate rise would lead to debt servicing cost increase of one per cent of GDP.
Moves to phase out the “double Irish” corporate tax scheme came amid an OECD-led overhaul of global tax rules. Asked whether Dublin had gone far enough in response to the OECD, Mr Gurría said it had.
“Ireland has been staying the course and it is making the necessary modification and the adjustments and I’m very happy, very proud to say Ireland has been strong and very exemplary case of adapting and adopting.”
