Troika to question spending in Budget 2016

The Government is to face questions from the troika next week over the scale of spending envisaged in the budget, amid concerns that next year’s fiscal plans are too expansionary.

Representatives from the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) fly to Dublin on Monday for a week-long visit during which they will meet senior officials from the Department of Finance, Central Bank and the main pillar banks.

With the European Commission due to deliver its verdict on the budget before the end of the month, it is understood the ECB in particular has concerns there is insufficient focus on structural reforms and debt reduction in the financial plan, announced on October 13th.

Under the terms of Ireland’s three-year bailout, which finished in December 2013, the country is subject to two post-programme surveillance visits by the troika each year until 75 per cent of the bailout loans are repaid, a process that could take decades.

The troika visit comes as the European Commission appraises the budgets of euro zone countries, with a decision expected before November 23rd when a special meeting of finance ministers has been convened to discuss the verdicts.

Two-pack rules

Under ‘two-pack’ rules introduced in the wake of the financial crisis, all euro zone countries must submit their budgets to Brussels for scrutiny before October 15th each year, with countries facing fines should they be deemed to be in breach of Stability and Growth Pact rules, including the requirement that governments maintain a budget deficit below 3 per cent of GDP and a debt to GDP ratio of less than 60 per cent.

Already, concerns have been raised about Spain and Italy's ability to reach their targets.

Ireland’s strong economic performance has boosted optimism in Government circles that the budget will be approved, particularly in light of the fact that extra tax receipts may lead to a further reduction of the deficit well below the ceiling of 3 per cent of GDP.

But unlike most EU countries, Ireland is subject to an additional level of scrutiny due to the bailout, with the troika of lenders legally permitted to demand changes to the budget if they feel that the country's capacity to repay programme loans is impaired.

Minister for Finance Michael Noonan is due in Brussels on Monday for two days of finance ministers' meetings.

Earlier this week, the European Commission said it expects Ireland’s GDP to grow by 6 per cent this year, three times the EU average.

Growth is forecast to reach 4.5 per cent in 2016 before slowing to 3.5 per cent in 2017.

But European Commission officials have warned that the pace of growth experienced in Ireland this year is unsustainable.

In particular, its analysis of the Irish economy warned that housing and infrastructure could be under pressure as positive net migration returns.

The concerns about the substance of the budget echo alarms raised in a number of quarters, including the Irish Fiscal Advisory Council and the Central Bank.

In addition, the outgoing governor of the Central Bank, Patrick Honohan, wrote to the Department of Finance ahead of the budget urging caution.