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Further €13bn in tax hikes and cuts are needed, warns OECD

IRELAND needs to find a further €13 billion in tax and spending cuts to start its debt burden on a downward path, new calculations from the OECD find.

This is one of the largest adjustments required among advanced economies, although Britain's gap is almost as big, the OECD study* says.

Even with an adjustment this size, it would take almost 30 years to get debt down to the 60pc of output (GDP) laid down in the the new eurozone fiscal compact which will be the subject of the referendum to be held in May.

The OECD economists do not advise that countries make such large corrections quickly. "In the short term, the pace of consolidation needs to be balanced with the effects of fiscal retrenchment on growth," they say.

Faster growth

A decision on how fast countries move to a situation where output is growing faster than debt will depend on the choice between taxes and spending, estimates of the impact on growth, and whether monetary policy, such as lower interest rates, can offset the reductions in demand.

The last point raises issues for the euro area, where monetary policy is the same for all member states, about whether it can be used to offset the adverse effects of budget consolidation.

"Other things being equal, slower consolidation will ultimately require more effort to meet a given debt target," the report warns.

The OECD paper favours property taxes as a way of avoiding the distortion caused by high labour taxes. Where tax burdens are already high, it says spending cuts may do less damage to growth.

"Countries can reap sizeable budgetary benefits -- both directly and indirectly -- by adopting 'best practices' for health and education spending and pursuing pension reforms.

"Governments can also reform transfer programmes, to rein in spending on often poorly-targeted social benefits, and to sharpen incentives to work and save," it adds.

"Governments should also emphasise less-harmful taxes, such as those on immobile property, and corrective taxes such as pollution charges," the report says.

Only four countries require bigger corrections than Ireland in order to reduce their debt to 50pc of GDP by 2050. But they include the world's biggest economy, the USA, whose fiscal stance affects the global economy.

"In many countries, just stabilising debt, let alone bringing it down to a sustainable level, will be a major challenge.

"The poor state of public finances will require wide-ranging fiscal consolidation in most countries, particularly in those whose pre-existing imbalances have been aggravated by the crisis, as well as in those facing rapidly rising spending on health and long-term care," the report says.

* OECD Economic Policy Paper No. 1, "Fiscal Consolidation: How much, how fast and by what means?" www.oecd.org

Irish Independent