On behalf of the Minister for Finance, I am pleased to have this opportunity to open the debate in this House on the recently published OECD Economic Survey of Ireland 2003.
The OECD undertakes an examination of the economies of its 30 member countries at up to two yearly intervals. Such examinations involve a visit by a team from the OECD's economics department to the country being examined. During the visits to Dublin the OECD team met officials from a number of Departments and representatives from organisations in both the public and private sectors, for example, employers, unions, the banks and economists from academic institutions. The OECD team is well placed to obtain a thorough and comprehensive understanding of the state of the economy and how it is likely to perform in the short and medium term. More importantly, the OECD is in a position to see how similar issues are dealt with in different countries and weigh the advantages of various approaches. Members of the OECD team are also able to see how the global economic situation evolves and the economy of a particular country is likely to be affected by international developments.
The draft report by the OECD team is reviewed by the economic development and review committee which is made up of representatives from the 30 member countries. The OECD's analysis and advice are a very valuable contribution to the development of economic policy. It is not surprising that most of the coverage in the media of the OECD economic survey tends to highlight specific recommendations in one or two areas rather than the broad thrust of its analysis and recommendations. However, I hope the debate in this House today will focus on the central themes of the OECD's examination and its key recommendations.
The OECD notes that Ireland's remarkable growth performance, which began in the mid-1990s and continued into the start of the new millennium, has led to rapid convergence of productivity levels towards the EU average, while employment growth has also been exceptionally strong. Living standards have increased dramatically as a result. It goes on to note that the unemployment rate fell from as high as 15.7% in April 1993 to a low of 3.7% in the first half of 2001 which led to recruitment difficulties. In the view of the OECD, the above potential growth has resulted in growing infrastructural pressures as evidenced by rapid house price increases, congestion and longer commuting times.
Competitiveness has been reduced by price and wage inflation which has been reinforced by infrastructural constraints. The OECD concludes its analysis by stating that, given these considerations, growth had to slow sooner or later, even though the downward shift in economic growth has undoubtedly been linked to the slowdown in the international economy and its impact on the ICT sector. It notes that the apparent resilience of economic activity is somewhat surprising given the series of economic shocks that affected the economy between mid-2000 and 2002. It attributes this resilience to the diversification in FDI investment in recent years as well as housing construction and the expansion of economic investment.
According to the OECD, after showing remarkable resilience up to the third quarter of 2002, the economy seems to have lost momentum as export growth slowed and confidence weakened substantially. The economy will, therefore, have entered 2003 with little momentum. However, given the expected recovery of world economic growth and the negative impact of the earlier appreciation of the euro fading, Irish GDP growth is forecast by the OECD to increase from 3.25% in 2003 to 4.25% in 2004. Meanwhile, the unemployment rate is projected to edge up. Inflation is forecast to fall due to wage moderation and the impact of the euro appreciation. The HICP rate is forecast by the OECD to fall from 4.75% in 2002 to 4.25% in 2003 and to fall more sharply in 2004. The Department of Finance will be updating its economic projections for this year in its economic outlook and review, which will be published later this summer.
The OECD considers that the long-term prospects for the economy remain broadly favourable. Some of the structural forces underlying the economy's recent slowdown remain of great importance when examining its future prospects. These include the prospects for business investment, for responding to the economy's infrastructural constraints and for future labour force growth.
One of the OECD's most significant conclusions is that prospects for business investment will depend on the extent to which regulatory reform opens up latent business opportunities domestically and the extent to which Ireland remains an attractive location for foreign direct investment. Ireland will face competition for inward foreign direct investment from the new members of the EU. It will face competition in respect of the skill level of the workforce and cost competitiveness. However, the OECD acknowledges that the rapid improvement in infrastructure and the skill levels accumulated should help Ireland to remain an attractive location for foreign direct investment and that the enlargement of the EU is also likely to increase total foreign direct investment flows substantially. As regards infrastructural constraints, the OECD acknowledges that those are rapidly being dealt with under the national development plan.
Having set out its analysis of Ireland's current economic situation and medium-term prospects, the OECD goes on to identify the key challenges which the economic situation now presents. First, it refers to the need to ensure that the public finances adjust to the slower growth environment so that their soundness is assured. This involves reconciling continuing large demands for public expenditure with smaller increases in tax revenues. While the report acknowledges the substantial improvement in public expenditure monitoring and control arrangements in recent years, it also recommends ongoing reform in this area.
The second challenge identified in the report is that of minimising the risks of a weakening in growth performance. This requires safeguarding competitiveness and maintaining the attractiveness of Ireland as a destination for inward investment. Finally, the report identifies the need for regulatory and environmental policies to focus more clearly than before on consumer interests.
The OECD sees these challenges as being related and mutually reinforcing. It says that reform of the public expenditure management system should entail an improvement in the quality of public services and help preserve the low tax environment. These should then contribute to safeguarding competitiveness as well as enhancing welfare. Regulatory reform in non-traded sectors should result in a better quality of services as well as lower prices. This should contribute not only to better welfare, but also to improved growth prospects by limiting the deterioration in competitiveness and supporting labour force growth.
This year's OECD report has a special chapter on enhancing the effectiveness of public expenditure management. The Minister for Finance welcomes this initiative by the OECD and views its recommendations as a positive and practical contribution to the ongoing improvement of public expenditure management arrangements. Members will be aware of the ongoing challenge of matching very genuine demands for improved public services with the Government's overall responsibility to ensure sustainability of the public finances over the medium and long term. This challenge is now being faced by many of the other OECD members and the organisation, therefore, has much valuable insight to offer based on best international practice.
I would like to deal specifically with some of the key recommendations of the report in that regard. The report acknowledges the reforms introduced to the budgetary process in 2002 and 2003, including the setting of expenditure targets by the Government for individual spending Departments at an early stage in the process. It welcomes moves towards a multi-annual capital framework for investment to facilitate greater planning of our infrastructural spending over the medium term. The Minister welcomes the recommendation of the OECD that we continue to build on these reforms. He intends to examine ways of further strengthening our budgetary and expenditure management arrangements in the coming years.
Members will be aware of the Minister's strongly held views on the need to achieve results for the money invested in public services. He secured the agreement of the Government last year to strengthen the expenditure review process to enable better quality information on results to be available in respect of key programme areas. To enhance accountability and public debate, completed reviews will in future be laid before the Houses of the Oireachtas. Senators will be aware that the national development plan accounts for more than 80% of our capital investment. A mid-term evaluation of the entire plan is currently underway and will be published in the autumn.
To progress further the agenda on results-oriented budgeting, the Department of Finance is currently leading a pilot project with three other Departments which is focused on linking resource allocation with outputs. Following this study, the Minister will consider whether the approach should be mainstreamed across other Departments.
The OECD also refers to the need to strengthen the accountability framework further. The management information framework currently being implemented across Departments will represent a significant step forward in this regard. It will also be a key tool in moving towards a focus on results rather than inputs, with the availability of better quality performance information. Members will be aware of proposals announced this week to strengthen the accountability framework in the area of health.
The report raises the issue of reform of the funding systems of local government. The Minister for the Environment, Heritage and Local Government has indicated his intention to carry out a fundamental review of local authority financing. That review will provide an opportunity for consideration of those and other views in this regard.
The OECD is a supporter of market instruments, including user charges, to help generate higher efficiency and better delivery of publicly funded services. The report points out that Ireland is unique among OECD countries in not charging domestic consumers for water services. It highlights the heavy subsidisation of third level education in Ireland, a topic which has been the subject of much intense debate in recent weeks. It also suggests that serious consideration be given to raising local revenues by reintroducing a local property tax on residential housing. The OECD's views on the introduction of water charges, for example, are based on its view of best practice around the world. It is interesting that it echoes, in some respects, the views of the independent Estimates review committee – or the "three wise men"– which made its report last October.
While these issues are undoubtedly sensitive and tend to draw a range of strongly held views right across the political spectrum, the OECD makes a useful contribution to the debate. It is the Minister's hope that the report will inform mature public debate on all these issues in Ireland.
As regards competitiveness, the OECD notes that the increase in prices in the non-traded sectors of the economy has been quite pronounced in recent years. The cost base of that sector is substantially determined by wage growth. Higher prices in the non-traded sectors increase the cost base for the traded sectors of the economy. The traded sector cannot easily pass on higher costs through higher prices. The profitability of firms in the traded sector risks being curtailed, with the potential to lead to retrenchment in their operations and job losses. The rising cost of living in the economy is also likely to reduce the attractiveness of Ireland as a location for high value added investment and associated high-skill workers.
The OECD is somewhat critical of the role of the social partnership agreements regarding wage increases. However, it acknowledges that the agreements have forged a common understanding of the problems facing the country and have contributed to industrial peace. The report also points out that there are signs that an adjustment in income expectations has begun to take hold and points to the new national agreement, Sustaining Progress, as a welcome example of this.
As regards regulatory reform, the OECD acknowledges that we have had some success in introducing competition in certain sectors, particularly in telecommunications and aviation. Such competition has yielded greater choice, improved services and led to lower prices for consumers. It notes that there has been progress in substantially strengthening the power of the Competition Authority and that new reform initiatives have been taken in the energy and local transport sectors as well as in the professions. The OECD concludes that success in pursuing reforms in the sheltered sectors of the economy will be the key to safeguarding cost competitiveness.
It is clear from what I have said that the OECD conducted a wide-ranging and incisive examination of the Irish economy and of the prospects for the future. The Minister for Finance shares the same vision for the economy as that put forward by the OECD. He also shares most of its views on how to make that vision a reality. However, he might differ with some of the more detailed and specific policy prescriptions in one or two areas. This is not tantamount to criticising or rejecting the OECD's valuable report. It is simply a recognition of the fact that, as Minister for Finance, he, together with his colleagues in Government, must decide on the best approach to be adopted in seeking to achieve our goals. The Minister agrees with the broad thrust of the OECD's advice regarding the need to safeguard our international competitiveness and the associated requirement to ensure sound public finances and foster greater competition in the non-traded sectors of the economy.
We must recognise the budgetary implications of lower economic growth. Lower economic growth means lower tax revenue growth and, as a result, the funds we have available to spend on public services will grow at a slower pace than in recent years. We must adjust our expectations to this new reality.