The International Monetary Fund has issued a warning about the state of Ireland's public finances, cautioning against rapid increases in Government spending and urging prudence on pay increases due under the benchmarking process.
In its annual review of the Republic's economy, the IMF says the Government's finances have suffered a "sharp deterioration" and expresses concern about the budgetary outlook in coming years. Unless checked, the deterioration which occurred in 2001 could bring considerable risks to economic growth in the future, the Washington-based authority says.
The IMF recommends that Government spending should in the future only get the go-ahead when it is certain that it will deliver value for money.
All spending programmes should be subjected to "rigorous" and "clearly defined rules", the IMF says, adding that output from spending initiatives should be monitored.
If a scenario emerges where spending outside such limits is needed, the Government should generate funds through widening the tax base rather than increasing tax rates, the IMF recommends.
The latest analysis also argues for a "cautious approach" in phasing in pay increases agreed under the recent benchmarking agreement.
Future wage agreements should be "divorced from reliance on fiscal concessions", according to the review. Wages must reflect market forces, the fund's directors say, warning against allocating additional funds to satisfy wage agreements at a time when spending needs to be tightened.
The IMF also says that a formal budgetary framework should be developed in coming years, arguing that "policy predictability" would be desirable.
The Minister for Finance, Mr McCreevy, yesterday welcomed the IMF's assessment of the economy, saying it would provide "useful input to the development of appropriate policies to ensure the success of our economy in future years".
Mr John Beggs, chief economist with AIB Group Treasury, said the IMF was offering "sound advice".
"We know where the problems are and what needs to be done," Mr Beggs said, encouraging the Minister to rein in spending and reduce wage expectations.
The IMF has predicted GDP growth of 3.2 per cent for this year, on the low side of most other projections. The forecast is based on an analysis conducted in May, before first-quarter GDP growth of 2.9 per cent had come to light.
It foresees steady growth in consumer spending, describing the outlook for the rest of the year as "broadly favourable" as long as the global economy picks up.
It concedes, however, that considerable risks are attached to this scenario. A strong euro combined with relatively high inflation and labour costs could hit the Republic's competitiveness and dampen economic growth.
Mr McCreevy said he agreed with this analysis, also emphasising the importance of a global economic recovery. "I also agree that we now face a number of challenges which must be addressed if we are to maintain our competitiveness," he said.
