Signs of excess demand and overheating in the economy have multiplied, the Organisation for Economic Co-operation and Development (OECD) has warned.
The Paris-based think tank, in its biennial country report on Ireland, highlighted housing as one of the key problem areas. It recommends that to help calm the market a new property tax should be introduced and mortgage interest relief abolished.
The OECD advises the Government to "expose the holders to higher holding costs" through the reintroduction of residential property tax, a restructured capital gains tax or other tax measures.
The Minister for Finance, Mr McCreevy, welcomed the report and said it would be "taken fully into account" by the Government in its future policy considerations.
However, speaking to RTE News, Mr McCreevy said this Government had no intention of introducing a residential property tax, saying he had to marry economic recommendations with political realities.
Other recommendations from the OECD include the reintroduction of third-level fees, water charges for householders and businesses, tolls on roads and abolishing all restrictions into the entry of the taxi and pub markets.
Mr Peter Jarret, the report's author, told The Irish Times that the key to the future of the economy was wage growth.
"The key factor in the coming months is the negotiation of the new agreement. If wages keep accelerating it would be a major concern."
He added that higher wages would put pressure on producers' cost competitiveness and on our ability to attract foreign investors, as well as on some domestic companies. Jobs would be lost in some sectors and growth rates could fall very sharply which could lead to a "radical decline" in house prices, he said.
However, he said he could not comment on the likelihood of this as it depended on the negotiators of the next agreement.
Nevertheless, the report does point to the "stunning economic performance" of the Irish economy. "No other OECD member country has been able to match its outstanding outcomes in a variety of dimensions."
But there are problems ahead and according to the report signs of excess demand and overheating have multiplied, despite the fall-off in the overall rate of inflation. It points out that the main factors behind the decline in inflation are dropping interest rates, cuts in indirect tax and oil price declines and all of these are expansionary.
It also points out that the inflation rate is not a particularly useful indicator in Ireland, which should be seen more as a region of a larger Continental economy.
It also calls for a strategic physical plan for the Dublin area as well as measures to deepen the private rental market. And in common with all other recent reports looking at the Irish economy it calls for road and rail infrastructures to be dramatically improved.
Other measurements to slow the economy down include offsetting tax cuts with other revenue raising measures. Public sector wage settlements should also take full account of their impact on national competitiveness, according to the report.
