THE EUROPEAN Commission has given the Government until 2013 to get its budget deficit below the limit allowed under the rules set out in the EU stability and growth pact.

It has also called for the broadening of the tax base and stronger budgetary controls to prevent overspending in an effort to boost the credibility of Irish economic recovery efforts.

“Given the scale of the required adjustment, a broad-based consolidation effort will be necessary, addressing both the expenditure and the revenue side of the budget,” said the commission yesterday in a report analysing the Government’s plan to reduce the deficit, which was published in January. The report said the credibility of Ireland’s recovery strategy hinges on the “timely specification of consolidation measures” due to its very weak economic situation.

It pinpoints the need for immediate efforts to increase taxes and cut public spending, while highlighting significant downside risks in the Government strategy.

“Especially after the collapse of the housing market, broadening the narrow Irish tax base and aligning reduced expenditure levels with sustainable revenue streams will be essential,” says the report, which predicts the deficit will widen to 11 per cent in 2009.

Under the EU’s stability and growth pact, member states are required to keep their budget deficit to Gross Domestic Product (GDP) ratio below a 3 per cent limit. They are also obliged to maintain a debt/GDP ratio below 60 per cent to ensure the smooth operation of the euro currency. In theory a government could face fines if it failed to bring its deficit under control, although no state has ever had to pay such a penalty.

Ireland is currently running the highest budget deficit in Europe, according to the commission, which predicts it will reach 11 per cent in 2009 and 13 per cent in 2010 if current Government policy is not changed. To address the situation the commission recommends annual efforts going beyond those published in the Government’s stability programme. It says this may be necessary to overcome downside risks such as the Government’s favourable assumptions for economic growth in 2011-2013 and the fragility of the banking sector.

“Contingent liabilities arising from the financial crisis, in particular from capital injections into banks and the governments bank guarantees (if called), could lead to more adverse debt developments,” says the commission report.

It also highlights a crucial need to address weaknesses in the Irish budgetary framework in order to enhance the credibility of the Government’s consolidation strategy.

“Budgetary targets for the years beyond that covered by the budget, especially expenditure envelopes can be changed in subsequent budgets . . . risks to the adjustment should be limited by strengthening the binding nature of the medium-term budgetary framework as well as by closely monitoring adherence to the budgetary targets throughout the year,” says the report, which will be considered by EU finance ministers before an excessive deficit procedure is opened against Ireland.

Minister for Finance Brian Lenihan welcomed the commission’s endorsement of the Government strategy to reduce the deficit below 3 per cent by 2013. “I look forward to the continuing support of the commission and council for the overall budgetary strategy of restoring stability to the public finances, while taking steps also to support economic activity and employment and improve competitiveness,” he said.

The Government’s emergency budget on April 7th is expected to outline spending cuts and tax increases as part of a new strategy to meet the 2013 budget deficit deadline. The scale of the current economic crisis has taken its toll on European economies leading several states to run budget deficits above the 3 per cent limit. The commission yesterday handed deadlines of 2012 to Spain and France, 2010 to Greece, and 2013/14 to Britain for their governments to return the budget deficits below the 3 per cent limit.

Some countries launching stimulus plans will not be forced to take action to address their deficit until 2010.

But EU economic and monetary affairs commissioner Joaquin Almunia said yesterday there was no “margin for manoeuvre” when it comes to Ireland.