A new report on the Irish economy says that it was perhaps the most overheated of all advanced economies.
The detailed analysis by the International Monetary Fund says the collapse of tax revenue could push the budget deficit up to 12% of national income this year, compared with a Government target of 10.75%.
The IMF says Ireland's seemingly unstoppable economic growth of recent years masked serious problems - including the fragility of the public finances. It says generous rises in public sector wages pushed up wages elsewhere, making Ireland less competitive.
In recent years, the IMF says, Ireland became the most expensive economy in the euro zone with the possible exception of Luxembourg.
It adds that the IMF and other commentators had warned about this. 'Yet dazzling growth and buoyant public revenues prompted tax reductions and expansion in public expenditures that have proved unsustainable,' it says.
NAMA pricing 'easier with nationalisation'
The report says losses now faced by the banks could be about €35 billion by 2010 - although the bulk of that would be absorbed the banks' reserves.
The IMF is broadly supportive of the Government's NAMA project to buy back bank debt. But it says setting a price for the purchase of those assets could be easier if the banks are nationalised. Not paying the right price, it says, opens the taxpayer to huge risks. The report says nationalisation could also be used to effect necessary mergers.
In a conference call with reporters, the IMF's mission chief to Ireland, later said he would not rule out the need for further nationalisations or mergers in the financial sector.
The IMF also says NAMA should be given more flexibility to deal with other types of loans and should not be restricted to loans linked to property development or construction.
While welcoming recent proposals to change the system of financial regulation, the IMF called for 'intensified bank-by-bank surveillance', including banks not currently covered by the State guarantee. It also urges Ireland to look at a new system to quickly transfer a troubled bank's assets and deposits to another institution, or set up a new bank.
IMF urges look at 'sensitive' areas
The report welcomes measures to address the problems in the public finances, but warned that these efforts would have to be sustained 'over an extended period of time'. The IMF says the focus should be on spending cuts, including 'sensitive' areas such as the public service wage bill. It also says social welfare programmes should be more targeted and welcomes proposals for a property tax.
The IMF is projecting that the Irish economy will shrink by 8.5% this year, with another 3% drop in 2010. It says unemployment will reach 15.5% of the workforce next year.
Minister for Finance Brian Lenihan said the report was a realistic and fair assessment. He said Government was taking steps to address the competitiveness and banking problems.
