European Commission warns of hard choices in budget

Wed, Aug 29, 2012, 01:00

THE BUDGET will test the Government’s ability to maintain public support and will require “difficult political choices”, the European Commission has said.

In a draft staff report compiled following the seventh review of the EU-IMF programme, the Commission noted that there was “no low-hanging fruit left” as December’s budget approached.

“The 2013 Budget will be a key test of the authorities resolve to continue progressing towards the essential consolidation goals and of their ability to maintain the necessary public support,” it said.

The Commission said efforts to reduce expenditure raise new and stable revenue “are likely to require difficult political choices”.

The report also warned that Ireland’s benefits system causes “work disincentives and unemployment traps”. It said more needed to be done to alleviate and eliminate problems caused by some features of the social welfare system.

It highlighted “the broadly flat and open-ended unemployment benefits that do not diminish with the duration” of unemployment.

The Commission prepares a staff report at the end of each quarterly review. It noted that while the fiscal adjustment secured so far had been sizeable, a considerable amount remains to be done.

The report said that while the implementation of the EU-IMF programme was strong, some expenditure overruns were recorded, “mostly on welfare payments and in the health area”. It noted that the Government had agreed to take corrective steps in the remainder of the year.

However, some of the health measures were described as “temporary in nature”, and the report said they may need to be replaced with more “structural” measures “if risks to the agreed fiscal targets are to be avoided”.

The report also noted that unemployment was set to fall only gradually to 13 per cent by 2015, and cautioned that there was a risk of a “more adverse outcome”.

The Commission said long-term unemployment continued to rise, with an increasing share of claimants of very long duration.

“In part this may reflect the structure of the benefits system in Ireland, whereby activation does not increase with the spell of the unemployment duration nor does unemployment assistance generally decline over time.”

The report said it will take considerable time for “the stock of unemployed” to decline once employment growth resumes. The ability of Irish firms to source labour abroad “means that the current stock of unemployed may not come down as rapidly with employment growth as has been the case in the past”, the report stated.

It noted that the EU-IMF mission to Ireland had called on the Government to consider all options in preparing the budget. “In particular, better targeting of the social support schemes and a further broadening of the tax base would help,” the report states.