The Organisation for Economic Co-operation and Development has called for spending cuts and a reform of property taxation.
In its latest report on Ireland, the Paris-based economic think tank urges spending cuts in social welfare, health and education.
Its report points to falling prices and lower private sector wages. The OECD says unemployment benefits should be cut and calls for much better measures to prevent people becoming long-term unemployed. It also says the minimum wage of €8.65 an hour is high, and should be reviewed annually.
The agency says there is scope for reducing health spending by cutting costs and redeploying staff, and says there is a need to look again at the medical card scheme.
It says class sizes at secondary level could be increased without reducing the quality of education received. And it says the Government should bring back third-level tuition fees.
On banking, it calls for speed in establishing NAMA and says nationalisation of any bank should happen only with the utmost reluctance. The OECD also calls for stronger regulation and supervision of banks, and adds that reform of how property is taxed would limit the effect of future housing falls and rises. It also says more people should be paying income tax.
The OECD also says there is currently an 'extensive and inefficient' system of tax reliefs, and many of these should be eliminated.
It expects a 7.5% drop in economic output this year, with the economy shrinking by another 2.4% next year.
Speaking in Dublin, OECD secretary general Angel Gurria said Ireland could not go into another economic cycle without a reform of property taxation. He said the OECD had warned in the past of risks caused by Irish tax system which is biased in favour of property and home ownership. The OECD also recommends the phasing out of mortgage interest relief.
The Minister for Finance Brian Lenihan said the Government had made no decisions on unemployment rates for next year but he said all all areas of spending were being reviewed including social welfare.