The International Monetary Fund (IMF) annual review of the Irish economy has concluded that the outlook is broadly favourable but has also warned of substantial risks associated with the US and European slowdowns.
The report's conclusions - which were first reported in The Irish Times two weeks ago - were welcomed by the Minister for Finance, Mr McCreevy yesterday, who described it as "commending" the authorities' handling of the economy.
As well as the threat to the Irish economy of a general global economic slowdown - and specifically a European slowdown - the IMF also highlighted two potential domestic risks: wage growth and a collapse in house prices.
If worker's expectations - in terms of pay rises - do not fall in line with economic conditions there will be excessive wage growth and an eventual loss of competitiveness, according to the IMF.
The fund also questioned whether national wage agreements may be "outliving their usefulness in their present form".
It notes that wage increases have on average outstriped the norms of each agreement since they started in 1987. "As the labour market tightens, agreements may become less effective in restraining wage growth to rates justified by productivity gains," it argues.
A well functioning labour market will be vital if the economy is to absorb external, economic shocks and maintain high growth over the medium term, according to the report. In any event, the partnership approach should be reformed to sharpen its focus and increase transparency.
Future agreements should allow "private sector wages to reflect market forces and for public sector pay to be aligned with wages in comparable private sector jobs".
Such reforms would "preclude the trading of tax cuts and spending increases for promises of wage moderation," according to the report.
A collapse in house prices could "depress domestic spending and create potential problems in the banking system," according to the IMF officials who visited Ireland in May to discuss the economy with Mr McCreevy and his senior officials.
The Irish authorities, however, were confident that "neither the slowdown in growth nor the softening of the housing market would pose any significant difficulties for the banking system," according to the report.
The fund concludes that the authorities' judgment is broadly appropriate but advocate that the creation of the single financial regulator announced earlier this year should be accelerated in order to strengthen the regulatory apparatus.
The IMF also looked at the Government's fiscal policy. It was critical of the 2001 budget and warned that the coming budget should not provide any further economic stimulus.
If the Government wants to cut taxes or increase expenditure the stimulatory effect of such measures should "be curtailed through offsetting measures elsewhere in the budget," the IMF warns. The fund is supportive of the Government's stance on tax reform, which it describes as commendable.
The report suggests that there is scope for further rationalisation of the tax code particularly the PRSI system and how it interacts with the income tax system.
The IMF also examined the issue of privatisation and regulatory reform. It concluded that some progress has been made in recent years, but there remains scope for further action in the sectors which the State has formally held a monopoly such as utilities and mass transport.
