Failure to control the public sector pay bill is a "major risk" facing the economy, according to the Organisation for Economic Co-Operation and Development (OECD).
It has warned the Government that it must - as promised in the budget - halt the growth in public sector numbers and that benchmarking pay rises must be granted only in return for improved efficiency.
The Irish economy has "lost momentum", according to the latest OECD economic outlook, published yesterday, and private sector wage growth has started to adjust to this, which will help to reduce inflation. However, public sector wages will rise more rapidly and the OECD advises the Government that these increases "should be strictly conditional upon demonstrated higher efficiency in that sector".
Public servants are to receive increases averaging 8.9 per cent following the recommendations of the benchmarking report, which was incorporated in the new national agreement, Sustaining Progress. While the first phase of the benchmarking increases is to be paid automatically, the two subsequent phases will, the agreement says, be paid only if there is verification of the productivity improvements being made. The committees to oversee this verification process are being established.
Following a 50,000 rise in public sector numbers over the past five years, the Minister for Finance, Mr McCreevy, committed in the budget to cap numbers immediately and reduce them by 5,000 over the next five years. The OECD warns that failure to control the public sector pay bill risks damaging the budgetary outlook and prospects for reducing inflation.
The OECD predicts that the rate of inflation will gradually ease from 4.7 per cent last year to 4.1 per cent this year and 3.2 per cent in 2004. It will remain above the euro average due to persistent price pressures in the services sector, according to the Paris-based forecasters in their latest twice-yearly outlook.
Overall, the OECD expects economic growth to remain weak this year, before a "modest acceleration" next year when an international recovery boosts exports. It forecasts GDP growth of 3.2 per cent this year, rising to 4.2 per cent next year. This recovery will be based, it believes, on a doubling of export growth to 7.1 per cent, from 3.5 per cent this year.
Business investment growth is expected to recover, although public investment and housing are forecast to remain growth areas both this year and next.
As a small open economy, Ireland remains vulnerable to any further rise in the value of the euro, the OECD warns. The single currency remained strong yesterday, closing above $1.10. The trade-weighted competitiveness index, a measure compiled by the Central Bank to measure the average value of the euro when compared to our trading partners, closed above 100 yesterday, almost 8 per cent higher than a year earlier. This rise is hitting the competitiveness of firms exporting outside the euro zone.
Ireland is also vulnerable to any global underperformance due to geopolitical or other factors, the report warns. Its forecast is for the global economy to stage a gradual recovery now that war in Iraq is over. However, it warns that anxiety over terrorism, SARS and economic policy still pose multiple threats.
It forecast sluggish economic growth of 1.9 per cent this year for the OECD group of 30 mainly rich countries, and said it expected a pick up around the year-end to allow more healthy growth of 3.0 per cent in 2004.
