Commission praises economy but warns of downside risks

The European Commission will issue a positive assessment of the Government's handling of the economy today and forecast that robust economic growth will continue, writes Jamie Smyth in Brussels

But it warns that Government projections of a 2 per cent inflation rate by the end of 2008 may be optimistic in its review of Ireland's economic programme for 2005-2008.

The EU executive will also warn of several risks to future economic performance, in particular the budgetary implications of dealing with an ageing population and the prospects of a sharp downturn in the current residential construction boom.

The commission's opinion, a draft of which has been seen by The Irish Times, concludes that Ireland's fiscal position is "sound" and its budgetary strategy is a good example of policies conducted in compliance with the Stability and Growth Pact.

Under the terms of the pact, the commission scrutinises states' economic performance and fiscal policies to ensure they can guarantee price stability, good governance and economic growth.

This latest opinion is based on an analysis of an update of Ireland's stability programme 2005-2008 supplied to the EU by the Government in December.

This update forecast a general government deficit of 0.6 per cent of gross domestic product (GDP) - the value of goods and services produced by the economy - in 2006 and 0.8 per cent of GDP in 2007 and 2008 (under the pact, a deficit above 3 per cent is deemed to be excessive). The update also estimates that the ratio of government investment to GDP will rise 0.5 per cent between 2005-2008, which results in average government investment well above the EU average.

The commission's opinion states that the risks to the Government's budgetary projections in the update seem to be on the positive side, in particular for 2006. It says that revenue forecasts might suggest cautious assumptions on tax projections in the stability programme. It says that capital outlays projected in the plan may turn out to be somewhat below planned allocations, in particular as a significant increase in capital spending to tackle the economy's infrastructure needs is projected over the programme period. However, it states that budgetary projections could be vulnerable if a series of downside macroeconomic risks in the medium term were realised.

The report cites potential downside risks from changing global economic prospects, given the openness of the Irish economy. It also highlights the dangers posed by any sharp downturn from the extended domestic residential construction boom. But it recommends that Ireland implement additional measures to address the long-term challenges posed by an ageing population, notwithstanding the current sound budgetary position.