THE EUROPEAN Commission has questioned the Government’s ability to implement its recovery plan and criticised the plan’s lack of clarity.
The comments are made in two reports which will be released today when Brussels will formally initiate an excessive deficit procedure against Ireland for the first time.
The report criticises the lack of clarity in the Government’s updated recovery strategy, which proposes to bring the deficit below the legal limit set by the EU within five years.
The commission pinpoints weaknesses in the Government’s plan as “unclear” and “underdeveloped”. The commission report criticises the Government plan as seeking a “sizeable cumulative fiscal consolidation objective which is neither allocated to the revenue or expenditure side nor supported by measures”.
The reports say Irish policymakers failed to maintain “a prudent fiscal course” during the boom, particularly in relation to maintaining spending targets. This tendency to change targets “might limit their ability to credibly commit to a consolidation strategy in difficult times”, conclude the reports.
It also warns that the Government’s €440 billion bank guarantee scheme could have a “potential negative impact on the long-term sustainability of public finances”, although in the absence of precise information it is not included in the commission’s deficit forecast.
Ireland is one of six EU states that the commission will today recommend should face an excessive deficit procedure, which is a process that allows the EU executive and other EU partners to recommend policies that would restore an errant state’s finances to order. France, Greece and Spain are also to be named.
“This is not about punishing Ireland. It is about applying peer pressure to help the Government get its house in order on the deficit,” said a commission official, who added that EU finance ministers had to approve the reports before the excessive deficit procedure formally opened.
The reports on Ireland, which are expected to be published today, say the Irish deficit was 6.3 per cent of GDP in 2008 and could rise to 13 per cent of GDP if policies are not changed. This greatly exceeds the 3 per cent limit set under the Stability and Growth Pact underpinning European monetary union.
The commission also says the long-term budgetary impact of ageing in Ireland is well above the EU average, mainly as a result of a relatively high projected increase in pension expenditure over coming decades.
It recommends the Government implement further pension reform measures in addition to pursuing fiscal consolidation and invites Ireland to “strengthen the binding nature of the medium term budgetary framework” and closely monitor whether the targets in the economic recovery plan are being met.
Minister for Finance Brian Lenihan will get an opportunity to debate the reports with EU finance ministers at an informal meeting of finance ministers in Prague in April.
Yesterday, German finance minister Peter Steinbruck said Ireland may need assistance from other members of the euro-zone bloc. His officials later said he was “listing hypothetical options”.