WAGE RESTRAINT is required in the near term to improve competitiveness and to raise the economy's export performance, the Organisation for Economic Co-Operation and Development (OECD) says in its latest economic survey of Ireland, published yesterday.
"Unless wage and price inflation are reined in, the export sector will not be able to contribute either to short-term adjustment or the long-term improvement in living standards.
"Real wage growth needs to be limited to increase in line with productivity or even less in the short term," the OECD report states.
The Paris-based think-tank's recommendation for pay restraint comes on the eve of negotiations on a new pay deal, which are due to commence next week.
The OECD also argues for higher taxes on Irish housing. Noting that Ireland taxes home ownership particularly lightly, it says that this results in inefficiency while also raising house prices. It advocates higher taxes on housing.
"Phasing out mortgage interest relief or introducing a well-designed property or capital gains tax would be desirable," the OECD states.
It suggests that the new Commission on Taxation should review the taxation of housing.
However, it concedes that "a profound tax reform of the Irish housing sector is unlikely to be implemented any time soon".
In the longer term, faster productivity growth and continued increases in the numbers of women working outside the home will be needed to underpin future improvements in living standards, the survey concludes.
Relative to other advanced industrial countries, women with children rarely participate in the Irish workforce, the OECD notes.
Against this background, it counsels changes to child benefit payments, indicating that they should be linked to participation in the labour market. In their present form, the OECD says that child benefit payments are poorly targeted, since they are paid to all parents, whether or not they are working or actually using childcare services.
"Ireland could get significantly greater value for money if support was linked to employment, job search or the use of formal childcare services. It has chosen not to go down this route because of a perception that it would discriminate against mothers at home.
"However, it is important to convince the public that the tax-benefit system is already biased against mothers at work, so a more targeted approach would not only deliver better value for money but would make the system fairer as well," the OECD says in reopening the tax individualisation debate.
Employment rates are also low among lone parents, the OECD notes. While this exacts economic costs, the social costs are much higher, since the consequence is extensive child poverty.
The best way to alleviate child poverty in these circumstances is to help lone parents to return to work. Current proposals by the Government to provide lone parents with greater support for training, job search and childcare, combined with a work requirement, must be adequately funded if they are to succeed, the OECD says.
The pace of productivity growth has faltered in recent years. Upgrading the country's physical infrastructure, strengthening competition in domestic markets, fostering innovation and improving the quality of education are seen by the OECD as the principal agents of faster productivity growth in the future.