The Department of Finance moved yesterday to assuage the Commission's fears about the economy.

"The Tánaiste [ Brian Cowen] has stated that he is determined to moderate the growth rate of current spending in line with the growth in available resources, thus ensuring the longer-term viability of the public finances," a spokesman for the department said.

"That is why he indicated at budget time that expenditure growth of around 8 per cent this year was a staging-post on the road to expenditures and revenues growing in line."

The Government's medium-term budgetary strategy is based on the objective of keeping the budget in structural balance and within the commitments of the EU Stability and Growth Pact. This strategy implies running a cyclically-adjusted balanced budget.

In assessing the Government's Stability Programme Update for the years to 2010, contained in the 2008 budget, the Commission raised no substantive objections to the thrust of the 2008 budget, although it noted a weakening in the structural budget balance this year.

But the Commission expressed concern at the absence of specific policies identified to maintain budgetary balance in the years after 2008.

It stated: "However, in subsequent years, there is a lack of information about what broad measures will be taken so that current spending growth will be contained below nominal GDP growth, especially as regards the public wage bill and social transfer payments, both of which have increased substantially in recent years as a per cent of GDP.

"Furthermore, there are also risks on the revenue side associated with previous commitments to reduce tax and social contribution rates," it said.

As a result of this risk assessment, the Commission concludes that the Government's current fiscal stance may be insufficient to deliver broad budget balance after 2008.

Such a deviation from the objective of structural budget balance "would not be in line with the Stability and Growth Pact" and would require a tightening of fiscal policy.

The Commission also suggests that the Government's projection for underlying inflation this year - at 2.4 per cent - "appears to be somewhat on the low side for 2008 given recent developments in food and energy prices".

The Department of Finance, however, said yesterday that it is standing by its December forecast.