The Government has been warned by the European Commission that it risks creating false expectations among voters by talking about tax cuts and spending increases before the next election.
The comments are contained in a draft report from the European Commission on its first post bailout review, which took place earlier this year, and come after numerous suggestions in recent months of tax cuts from Taoiseach Enda Kenny, Minister for Finance Michael Noonan and other ministers.
The report, submitted to the Oireachtas finance committee yesterday, also says weak mortgage lending does not, as of yet, pose a risk of a credit-driven property bubble.
The Government is committed to reducing the deficit below 3 per cent by 2015 in the October budget. While it was originally planned that the next budget would see a €2 billion adjustment package, this has been questioned by some in government who argue that austerity has reached its limits. However, there is still broad agreement the deficit target must be reached, even if the adjustment is less than originally planned.
The commission also warns the Coalition that there is “no room to manoeuvre” on the deficit. “Rising political pressure could increase uncertainties around budgetary plans for 2015,” the report says.
“In the very recent past, statements and discussions have appeared in the political debate assessing the possibility of cutting taxes and/or increasing spending in light of improving economic conditions. While no concrete measures have been tabled, any plans to cut taxes or increase expenditure would need to be compatible with the agreed fiscal consolidation path.
“These statements can create expectations that may be difficult to manage, especially in view of the general elections due at the beginning of 2016 or earlier.
“At the same time, the budgetary projections of the 2014 stability programme and the latest commission services’ forecast reveal no room for manoeuvre, also taking into account that growth projections underpinning budgetary plans are still subject to downside risks.”
It notes that Ireland has so far over-delivered on its budgetary adjustments but argues there is now an "increasing tendency" to rely on efficiency measures as well as eligibility changes in health and social welfare payments.
Furthermore, expectations that growing tax receipts from economic growth will “relieve the need” for further spending cuts appear “somewhat optimistic”, particularly in regards to consumer and wage growth.
It also warns about the Government’s proposed mortgage insurance scheme for first- time buyers of new homes, saying it “will be crucial to prevent potential effects on house prices and possible contingent liabilities for the State”.
Low housing supply levels are identified as a problem, with current forecasts for house completions insufficient to meet demands
The latest paper also repeats concerns about the pace of reform in the legal sector and says “slippages in the health sector constitute a risk to the achievement of the 2014 fiscal targets and deserve close monitoring and action”.
The Government’s decision to abandon the review of medical cards, which was originally intended to save €113 million, and an inability to deliver original Haddington Road savings, are also noted.
The slow pace of loan and mortgage restructuring is also mentioned, as is the “limited use” of the new personal insolvency, which is attracting “criticism that it is expensive among other issues”.
