THE EUROPEAN Commission has told the Government it should restrict its budget deficit to 9.5 per cent of GDP in 2009, opening up a potential rift between Dublin and Brussels.

“The Irish Government has established a target of this year’s deficit around 9.5 per cent of GDP and they are committed to achieve this target. And we fully support their commitment,” said economic and monetary affairs commissioner Joaquin Almunia at a meeting of EU finance ministers, which discussed the Irish budget deficit.

His comments follow indications from the Government this week that it is preparing to overshoot the 9.5 per cent budget deficit target, which it set out in a strategy in January.

Minister for Finance Brian Lenihan later shrugged off the comments, which he said did not reflect the fact that the position had deteriorated since then. He said the position would be made clear in next week’s budget and stressed “there was no disconnect” with Mr Almunia.

“The issue is not figures. The issue is that the broad approach the Government takes is clear and decisive action to repair the public finances,” said Mr Lenihan, who added that no one at the meeting had indicated the Government should stay at the 9.5 per cent target.

In January, the Government made an exchequer balance projection of €18 billion and said it expected the general Government deficit to be 9.5 per cent of GDP in 2009. But it recently acknowledged that this target will not now be met due to the worsening crisis.

There is concern in Brussels that the Government should not continue to change its forecasts for its deficit, which is already the highest in the EU. Mr Almunia singled out Ireland and Greece as two countries that need to take immediate action on their deficits.

“We are convinced to restore confidence, to attract investors, to create the conditions for a sustained recovery of the Irish economy, one of the necessary conditions is to start the fiscal consolidation that will restore medium-to-long term sustainability of Irish public finances,” said Mr Almunia, who added he looked forward to the budget next week.

Mr Lenihan refused to be drawn on detail of next week’s budget, although he highlighted there would need to be tax increases and cuts in public spending.

“Two-thirds of the [public] expenditure is in transfer payments to social welfare recipients and public servants so I think we have to focus on where the problem is,” said Mr Lenihan, who added he would outline the Government’s plan to deal with the impaired assets in the banking sector.

ECB president Jean-Claude Trichet also rejected suggestions that the euro zone was not doing enough to help states such as Ireland facing economic difficulties.

“We are refinancing in an unlimited fashion at fixed rates Irish commercial banks through the Irish national bank and on the basis of a collateral framework that is very very open, very very forthcoming and has been made more forthcoming,” said Mr Trichet, who noted this amounted to considerable solidarity.