European Commission questions Government’s budget plan

The European Commission has questioned the Government's plan to increase spending and cut taxes in next year's budget, calling for a "more ambitious budgetary target" for 2016.

The promise of a more expansionary budget for next year was the cornerstone of the Government's five-year budgetary plan unveiled in the Spring Statement this week. But in its third post-programme report on Ireland following this week's troika visit to Dublin, the European Commission says that a more ambitious budget deficit target would allow Ireland to pay down its debt and help protect the Irish economy from future shocks.

“In light of the very strong economic recovery, a more ambitious budgetary target for 2016 would accelerate the reduction of the high government debt-to-GDP ratio and help protect against future shocks,” the report which was published today states.

The Commission said that it will “fully assess” the Government’s Spring Economic Statement in the coming weeks and present its conclusions before the end of May.

While the European economics commissioner Pierre Moscovici has agreed to the Government's request for greater leniency as regards how some budget calculations are made, the Commission can still exert pressure on Ireland to meet its overall budgetary targets set by Brussels under the Stability and Growth Pact.

The European Commission has consistently argued that the Irish government needs to use the recent economic momentum to pay down debt rather than increase spending, noting that Ireland has one of the highest debt to gdp ratios in the European Union.

While noting the strong economic performance enjoyed by Ireland since exiting the bailout, the report warns against complacency.

“The legacies of the crisis demand further continued and determined policy efforts, in particular in the areas of fiscal adjustment, financial sector repair and restructuring,” the report states.

Under the terms of Ireland’s bailout programme which expired in November 2013, the country still remains subject to two post-programme surveillance missions by the Troika until 75 per cent of its bailout loans are repaid, a process that could take decades.

Officials from the ECB, European Commission, IMF and the European Stability Mechanism arrived in Dublin on Monday and met with representatives from the Department of Finance, the Central Bank and the banking sector. The next post-programme surveillance mission will take place in the autumn.

The report also called on the Government and banking sector to accelerate loan restructurings, highlighting the continuing problem of non-performing loans in the Irish banking sector.

While the Commission notes that the number of non-performing loans have declined, it says that they still accounted for 23.2 per cent of total loans at the end of last year, with the share of commercial non-performing loans even higher.

“Loan restructurings need to accelerate and their sustainability should be continuously monitored. Progress has been made in implementing out of court solutions that facilitate engagement between lenders and borrowers, but issues with the legal system should be properly addressed,” the report states.