Commission warns Government of spending pressures

Pressures are emerging on government spending that raise of risk of moving the Republic off the recommended path for improving its public finances, the EU Commission has warned.

In a statement following the end of a bailout follow-up mission here, it notes the recently announced spending increases in the departments of health and justice and says they amount to some 0.25 per cent of GDP. It warns that this could increase the budget deficit “unless they are matched by higher than anticipated revenues.”

“ Moreover the new government plans further cuts to personal income taxes and VAT rates that remain to be specified in detail,” the report says.

It adds that additional work is needed “to make the tax system more efficient and growth-friendly through a shift towards less distortionary taxes.”

The EU Commission sees room to broaden the tax base with a view to limiting the risk of future volatility. While it does not speicify in this statement how this would be done, it has previously pointed to the need to impose charges on water and to braoden the property tax base.

It adds: “Improving cost effectiveness in healthcare, especially in hospitals and pharmaceuticals, remains a challenge.”

Housing

The commission says that undersupply of housing remains a key issue which needs an adequate policy response by measures to boost supply.

It describes Ireland’s economic adjustment as “ remarkable” and says the challenge for the new government is to maintain the momentum.

Housing and infrastructure bottlenecks need to be tackled more ambitiously, it says, pointing out that state investment levels remain at a low level of around 1.8 per cent of GDP.

It urges the Government to continue to comply with the EU fiscal rules and says that “sales of government-owned shares in the domestic banks would further reduce debt.”. It notes the proposed legislation to allow the Central Bank to cap mortgage rates and the statement by the Government that the ECB must be consulted on this.

The EU Commission is relatively optimistic on growth, forecasting GDP growth of 5 per cent this year and 4 per cent next yearHowever it warns that risks are “ tilted to the downside” due to the uncertain outlook for global growth and the possibility of a British vote to exit from the EU. It now longer visits Ireland under the umbrella of the troika, following Ireland’s exit from the bailout. However twice-yearly surveillance missions are now undertaken by the EU Commission, the ECB and the European Stability Mechanism, the rescue fund which advanced significant money to Ireland during the bail-out.

The EU Commission has already been provided with an update on Ireland’s budgetary outlook, but the Government will update this with the publication of a Summer economic statement later this month. This will provide more detail about the Government’s outline plans for the Budget and its expectations for how much scope it will have on Budget day - the so-called fiscal scape - to increase spending and cut taxes. Previous estimates were that around €900 million would be available for Budget 2017.