The International Monetary Fund has issued a warning on public sector pay, saying the Government should contain the wage bill as the advancing recovery starts to "fire on all cylinders".

The Washington-based fund has also suggested social protection expenditure could be curbed by means testing the distribution of medical cards for the over-70s and child benefit payments.

The IMF’s intervention comes as the Coalition prepares to invite unions to pay restoration talks after it takes stock of exchequer figures for first quarter of the year, which ends next week.

“The expiry of the Haddington Road Agreement in 2016 will lead to pressures for some reversal of past savings that were key to Ireland’s consolidation to date,” the fund said in a new assessment of the Irish economy.

‘Impede progress’

“There are risks that these pressures impede progress to fiscal balance: any developments on future public sector wage arrangements must recognise the very tight fiscal constraints in coming years.

“Further cost reductions and service delivery improvements through implementation of the Public Service Reform Plan 2014–16 should also be sought.”

In addition, the IMF called for further efforts to broaden the tax base and said the proceeds of bank privatisations should be used to pay down public debt.

The fund also supported the Government’s campaign in Brussels to secure flexibility in the application of new European budget rules, with caps on public expenditure now the primary source of friction.

“In Ireland’s case, the current EU methodology understates cyclical swings in unemployment, with implications for estimates of output gaps and potential growth,” the IMF said. “Staff therefore welcomes ongoing work by the Irish authorities to refine some aspects of the [European Commission] methodology.”

The IMF’s “article IV” report is an annual evaluation separate to ongoing scrutiny of Ireland’s performance in the wake of the EU-IMF bailout.

In a statement, Minister for Finance Michael Noonan said the Government was "fully aware" of the importance of sound budgetary policy and was committed to a steady adjustment path in reducing debt.

The IMF said the recovery was off to a good start, adding that there had been “some settling in the political situation”, with polls in early 2015 showing a rise in support for the Coalition parties.

It argued, however, that bright prospects for the Irish economy were clouded by risks and this called for continued prudence in fiscal and financial policy.

Widening VAT net

The IMF said the broadening of the tax base should be protected in the future by widening the VAT net and using fresh housing valuations for property tax .

“Reforms to broaden the VAT base could significantly bolster revenues without raising the main VAT rate – even closing one-quarter of the ‘policy gap’ could generate 1 per cent of GDP in additional revenue,” it said.

On the same day as the Economic and Social Research Institute questioned the scope and timing of new Central Bank mortgage caps, the IMF welcomed those rules and said they should be applied proactively as risks evolve.

“Close supervisory monitoring of compliance with the new rules is essential. Addressing the weakness in housing construction will help dampen price increases over time.”

The IMF also called for further steps to tackle prolonged mortgage arrears, saying greater utilisation of insolvency procedures would be helpful.