ECB critical of failure to control spending

The Republic is one of the states identified by the European Central Bank (ECB) for failing to control spending in recent budgets.

Its latest monthly bulletin strongly criticises six countries for implementing tax cuts without accompanying measures to control spending,

"The most pronounced budgetary deterioration" between 1998 and 2003 took place in Germany, France, Italy, the Netherlands, Greece and Ireland, according to a special review of budget policy in the January bulletin.

In these countries tax reform was not accompanied by sufficient spending control, the ECB argues, leading to a worsening of their budgetary position.

The Department of Finance strongly rejected the criticism last night. A spokesman said the Government has proven its commitment in terms of control of public spending, reducing its growth rate from 23 per cent in 2001 to less than 7 per cent last year.

The general government deficit last year was just 0.1 per cent of gross domestic product (GDP), he pointed out, spending came in on budget and Government forecasts indicated that expenditure was on a sustainable trend for the next few years.

The ECB has focused on a measure of the so-called structurally adjusted budget deficit - the deficit level adjusted for the state of the economic cycle. This measure shows a worsening budget position here.

However, the Department spokesman said that the ECB's work was based on European Commission methodology and the Commission had conceded that there was "an unusually high margin of uncertainty" in applying these calculations to the Irish economy.

While it does not go into details on any country, the ECB's criticism of the Republic is probably based on the sharp increase in spending in the run-up to the last election, which accompanied significant tax reductions.

In the past two budgets, spending growth has slowed sharply and tax levels have risen.

The ECB report called for a "reinvigorating" of EU budget rules in what analysts said was an early warning to governments against free spending as their economies pick up.

"Reinvigorating the implementation of the fiscal framework in good times, as expected ahead, can set in motion a virtuous circle of sound public finances, structural reform and high growth that supports macroeconomic and price stability," the ECB said in its January monthly bulletin.

The ECB said that governments' failure to bring budgets into a healthy state since the single currency was launched in 1999 proves that EU budget rules need to be strictly enforced.

Last November, EU finance ministers suspended the Stability and Growth Pact's rules rather than reprimanding Germany and France for not cutting their deficits as promised. The European Commission is going to court seeking to enforce the rules, which limit countries' deficits to 3 per cent of their GDP.

(Additional reporting, Reuters)