Budget 2018 criticised by European Commission

The European Commission has warned that revenue-raising measures contained in Budget 2018 were biased towards "highly volatile, pro-cyclical and uncertain tax bases".

In its latest post-programme surveillance report, the commission says the domestic economy has maintained its strong momentum but warns of a number of risks to the economy, most notably the threat of Brexit and changes to the international tax regime.

The impending international changes to tax highlights Ireland’s exposure and our concentration of corporation tax revenue from a small group of companies, it says.

The commission also warns of the need to address the persistent supply shortages and the strong increases in residential prices and rents.

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“Rapid price increases are now widespread across the country, although significant regional differences in absolute terms remain.”

It added: “While house prices appear to be in line with fundamental factors, pressures on the market are reducing affordability.”

The report notes house prices have grown at an average annual rate of 9.2 per cent between 2013 and 2016. In 2017, there was an increase of 11.6 per cent.

Rent inflated by 6.1 per cent in December 2017, with rents 18.5 per cent above their previous peak level in 2008.

Height restrictions

Housing policy, it says, must be underpinned by a concrete regulatory framework that facilitates higher densities and welcomes proposals to lift height restrictions.

However, the commission stresses the problems in the housing market must be offset by an acceleration of supply, in the private sector but also the public sector.

Staff from the European Commission and the European Central Bank conducted a visit to Dublin in late November as part of its post-bailout surveillance.

This is the eighth such visit and the Commission prepares a staff report for the Department of Finance.

The report, which will not be published until mid-February, concludes Ireland will not fully comply with EU fiscal rules in 2017 and 2018 due to a "significant deviation" from the required adjustment path.

While the Commission acknowledges the Government need to prioritise investment, it says it must use any windfalls to build up buffers for future shocks.

Now is an opportune time to make its public finances stable, it says but adds past developments have been at odds with this.

The recent budget, it says, relied on uncertain taxes which may turn unsustainable.

The measures contained in Budget 2018 do not contribute to expanding the tax base and falls “short on the overall policy goal of reducing revenue volatility”.

Banking system

On the banking system, the commission says their resilience to shocks have improved but important challenges remain pointing to the non-performing loans and weak credit demand.

The risks to the financial institutions surround the UK's decision to withdraw from the European Union. However, a proposed piece of legislation to cap interest rates on variable rate mortgages should be avoided, the commission says.

It warns the Bill could have “negative implications for the transmission of monetary policy, financial stability and bank competition”.

Concern is also expressed over the fall in public confidence in the financial institutions over the treatment of tracker mortgage holders.

The full impact, it says, is not yet known and is dependent on the final outcome of the Central Bank investigation.

The commission's report will not be published until mid-February but is to be considered by the Oireachtas committee on finance.