THE European Commission has called for reform of the Irish taxation and social welfare systems to stimulate the creation of new jobs.

In a glowing assessment of Ireland's recent economic performance, the new EU report, The Economic and Financial Situation in Ireland, says that, although Ireland is among the best performing economies in Europe, there is still scope to further enhance employment growth.

Ireland's economic policies are consistent with the requirements for the transition to EMU as well as participation in monetary union itself, according to the report, issued by the EU Commissioner, Mr Yves Thibault de Silguy.

Growth averaged 4 per cent a year from 1991 to 1994, while inflation remained subdued below 3 per cent since 1989 and the debt ratio declined substantially. This means that Ireland is among the best performers in Europe in terms of joining monetary union.

The Minister for Finance, Mr Quinn, welcomed the report. He said he was "particularly pleased" to note that Ireland was among the best performers. He added that he agreed with the Commission that the challenge was to maintain competitiveness and that tax reform would attract a high priority from the Government.

"The challenge facing the Irish authorities for the future is to sustain this strong performance and to diminish the imbalances in the economy within the context of moving to a single currency," according to the report. "The prospects for continued growth and prosperity in Ireland remain favourable.

The report predicts that gross domestic product will grow by 5.6 per cent in 1996 and by 4.8 per cent in 1997. From then on growth is forecast to remain at about 4.5 per cent until 2000.

It also predicts the Government's "modest projections" of average annual net employment growth of 15,000 from 1994 to 1996 are "likely to be surpassed".

The major risk to these prospects would relate to any tightening of policy in the EU and any resulting slowdown in EU growth, given the sensitivity of the domestic Irish economy to external developments, it adds.

The study also identifies a number of "imbalances" in the Irish economy. Overall investment performance has been inadequate, despite substantial funding from the EU and foreign direct investment inflows, it says.

Over the 14 years since 1980, the investment ratio in Ireland has almost halved from 29 per cent of national output in 1980 to 15 per cent in 1993. Investment growth on a yearly basis has more often been negative than positive, although it has grown strongly over the past couple of years.

The report points out that the benefits of the export strategy are not being fully realised as the benefits are going overseas rather than being translated into more jobs, due to the low level of investment. The report also points to Ireland's "inadequate employment performance".

Both of these problems are partly the result of the weak performance of indigenous Irish industry during the 1980s, it says.

According to the report, during this period growth and employment were sustained by direct foreign investment and by structural fund transfers. This led to a "degree of duality" in the economy, with a high tech, productive, foreign owned manufacturing sector and a weaker indigenous economy with lower productivity and a higher employment intensity.

The report adds that Ireland's development strategy remains cent red on industrial development, although the services sector has been the greatest source of employment growth in recent years.

It recommends that tax reform be considered essential. It also points out that removing obstacles to competition, such as entry requirements for professionals and licensing systems, could play an important role in stimulating greater employment in the services sector.

However, the report notes that a "poor record" in employment creation is an outstanding feature of EU economies.