The government should aim for a balanced budget so that there is the fiscal space needed to support growth, the OECD has said.
It also warned that the Irish economy was close to overheating on the back of spiralling property prices combined with an undersupply of housing.
“Given elevated uncertainties, policies should firmly focus on underpinning stability and making the economy resilient against shocks,” it said.
“The fiscal stance is projected to be less contractionary than in past years, as public investment will reverse its past declines. Due to past fiscal efforts and strong GDP growth, the fiscal deficit has diminished sharply and public debt is on a downward path.”
The government should eliminate the budget deficit which will enable it to increase investment in the economy, it added. Yesterday, the Irish Fiscal Advisory Council made similar recommendations. It urged the government to focus on getting rid of the deficit and paying down debt.
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Other risks noted in the OECD assessment include the outcome of Brexit negotiations and the high level of private debt which leaves the economy sensitive to a rise in interest rates. It also warned that wage increases could feed through to higher inflation.
“Conversely, property prices might rise more strongly than projected, which would support construction activity in the near term, but might also sow the seeds of another bubble.”
Moody’s, the credit ratings agency, upgraded the long-term debt and deposit ratings of Bank of Ireland and Allied Irish Banks yesterday.