Brussels anxious over increased Government spending

The European Commission has expressed anxiety about Government moves on the eve of the 2016 budget last October to increase year-end expenditure in 2015 by up to €1.5 billion.

The EU executive said in a report this afternoon on Ireland that the economic rebound was “remarkably strong”, but it found that the momentum of fiscal adjustment was waning. “Recent budgetary decisions give rise to some concern,” it said.

The commission’s findings are set in its official report on a post-bailout inspection of the Government’s affairs in November.

Two visits take place each year until 75 per cent of Ireland’s €45 billion rescue loan from Europe is repaid.

The report said the 2016 budget was “broadly compliant” with fiscal rules, adding that Dublin remained on track to correct the excessive budget deficit in 2015.

However, the commission said supplementary estimates for the end of 2015 provided a “permanent” increase in spending and were financed by “very strong but generally volatile” corporate tax receipts.

The EU executive said the Irish authorities had been told on two previous occasion to use growth windfalls to accelerate debt reduction, most recently in policy recommendations issued last May.

“A faster reduction of government debt would make Ireland less vulnerable to future economic shocks by creating the necessary fiscal space,” it said.

“The new measures in budget 2016 could have been more supportive of growth. On the revenue side, initiatives aim primarily at increasing the incentive to work through a reduction of the marginal income tax rate.”

Noting that the participation of women in the labour market remains below target, the commission said budget measures to tackle the problem would have been desirable.

It also found fault with measures to reduce the tax base, saying such steps weigh on the sustainability of revenue in the medium-term. In particular, it cited the increased the threshold for the universal social charge and the postponement of revaluation of self-assessed property values.

“On the expenditure side, measures focus on raising public sector pay and increasing a wide range of social protection payments which could have been better targeted.

“Government investment expenditure, which was significantly reduced during the post-2007 consolidation process, continues to be low by historical standards and compared to the euro-area average.”

At the same time, the commission said its assessment of the 2016 budget points to a risk of “some deviation” from the appropriate adjustment path towards Ireland’s medium-term budgetary objective.

“As a result, the commission invited the Irish authorities to take the necessary measures to ensure that the 2016 budget will be compliant with the stability and growth pact,”

“While the estimated improvement of the structural budget balance of 0.8 per cent of gross domestic product in 2016 exceeds the required effort of 0.6 per cent of GDP, the growth rate of government expenditure, net of discretionary revenue measures, is expected to outpace the limit imposed by the expenditure benchmark by some 0.4 per cent of GDP.”

The commission said the economic rebound was much stronger than expected, adding that current conditions provide a “unique” opportunity to accelerate debt reduction.

“The focus of economic policy making is gradually shifting away from crisis legacy to long-term matters such as how to safeguard strong and balanced economic growth in the future.

“The main economic policy challenge for the coming years is twofold: (i) strengthen instruments and frameworks that mitigate the risk of boom-bust cycles, and (ii) underpin medium-term growth, by addressing housing and possible infrastructure bottlenecks.”

After Ireland recorded fastest rate of economic growth in the euro zone in 2014 and 2015, the commission said growth in 2016 would continue to outpace other members of the currency in 2016.

“Economic growth is projected to moderate towards more sustainable rates in the medium term,” it said.

“Supply constraints in housing and infrastructure could become more accentuated as the country is likely to return to positive net inward migration and government investment expenditure is set to recover only very gradually.”