The European Commission yesterday delivered an upbeat assessment of Ireland's public finances while warning that wage expectations had to "adapt to the changed economic environment".
If wage increases were not moderated, the Commission warned, there would be a serious risk to inflation. Mr Pedro Solbes, the European Commissioner for Economic and Monetary Affairs, said it was up to Ireland to get to grips with its inflation, which is the highest in the euro zone.
"The inflation question, as in Spain, has to be tackled on the national level," Mr Solbes said. "It means that fiscal policy, wages policy and competition policy have to take decisions to solve this problem." Anxious not to be seen to be dictating policy to the Government, he added: "It is purely a national decision." The annual inflation rate foreseen in the Government's stability programme is projected to be 4.8 per cent for 2003, falling to 3.5 per cent in 2004 and 2.6 per cent in 2005.
In its most critical comments on the Government's programme, the Commission says: "The projected decline in inflation should be attained, otherwise there is a serious risk to price stability and competitiveness, particularly if wage expectations fail to adapt to the changed economic environment compared with the rapid growth of the late 1990s."
The partnership talks, which are expected to conclude shortly, envisage wage increases for the private sector of 7 per cent over 18 months. Public-sector workers will get an additional 9 per cent on average under a benchmarking agreement.
A spokesman for the Government said: "The changed economic environment is the context in which the negotiations are taking place. The pay deal is designed to ensure and promote competitiveness within the current economic environment."
The Commission's words echo comments made a fortnight ago in its assessment of Ireland's compliance with the Broad Economic Policy Guidelines. In that earlier document, the Commission warned that Ireland should "reconsider" the social partnership tradition "in view of the major changes in the economy, such as the move to conditions of close to full employment".
Mr Solbes's spokesman, Mr Gerassimos Thomas, said the Commission had formed no judgment on the wage agreements currently being reached in the partnership talks because they did not form part of the stability programme submitted by the Government to the Commission.
The Commission's task is to assess whether each government's programme complies with the EU's Stability and Growth Pact, which demands that budget deficits should be below 3 per cent and that governments should bring their budgets into balance or close to balance.
The Commission's assessment forms a recommendation to the council of EU finance ministers, who are expected to reach a formal opinion at their meeting on February 18th. The ministers will also have to consider a Commission report on the UK stability programme, which warns that Britain risks breaching the 3 per cent ceiling for budget deficits. Earlier this month, the council issued a particularly critical verdict on the French government's stability programme.
But aside from the concern about inflation, the Commission's verdict on Ireland's stability programme is, a Commission official said, "very positive".
The Commission does criticise the Government for "a strongly expansionary" fiscal policy in 2002, which ran counter to the specific budgetary recommendations in the Broad Economic Policy Guidelines.
But the Commission makes clear that it can live with the projected budget deficits of 0.7 per cent of GDP in 2003 and 1.2 per cent in both 2004 and 2005. "In spite of the ongoing deterioration in the nominal balances, the underlying deficit is estimated to improve from a peak in 2002 and to move closer to balance towards the end of the programme period ." The Commission also notes approvingly that fiscal policy will be tightened in 2003.
The Commission notes that the budgetary targets for 2004 and 2005 include increasingly large contingency provisions.
"If unused, the budgetary position in 2004-05 would improve significantly," the report says.
The Commission observes that Ireland has the second-lowest debt-to-GDP ratio in the EU. Although this is forecast to rise marginally to 35 per cent by the end of 2005, the Commission approves of the cause: building up assets in the National Pension Reserve Fund.
"Ireland is in a relatively strong position to cope with the budgetary impact of ageing populations, in view of its low debt level, gradual build-up of assets in the National Pensions Reserve Fund and relatively young population."
The Commission concludes: "Running such a limited deficit in underlying terms may be considered fundamentally consistent with the Stability and Growth Pact."
A cautionary note is sounded on the long-term sustainability of the public finances. In the long term, there is a risk of budgetary imbalances unless policies are altered. Social welfare spending has to be put on a more sustainable footing and the Government should not perpetuate underlying deficits.
