MINISTER FOR Finance Brian Lenihan has warned further cuts in public spending and tax increases may be necessary to get the Exchequer's Budget deficit under control.
He has also defended the Government's handling of the economy in the face of criticism from the European Commission over excessive levels of public borrowing in Ireland.
"There has been a very rapid deterioration in the Irish economy in the last year and the commission have acknowledged that they have been taken by surprise by the rapidity of the deterioration. So you can't lay that at the door of the Government," said Mr Lenihan when asked if Government policy was to blame for the housing bubble and the recession.
He said Ireland had been harder hit by the economic slowdown than any of its EU partners because it was an open economy with ties to the British and US economies.
One of the main factors fuelling the domestic housing bubble in the Republic was the low interest rate policy pursued by the European Central Bank, said Mr Lenihan.
"I'm not blaming Europe I'm simply drawing your attention to the objective economic factors that are there," he said as he arrived at an EU finance ministers meeting.
Mr Lenihan's comments followed a decision by the commission yesterday to recommend opening an excessive deficit procedure against Ireland because of its ballooning Budget deficit. Economic commissioner Joaquin Almunia announced the measure, noting Ireland's public finance position had "deteriorated very, very rapidly".
Under the EU stability and growth pact states must keep their budget deficit to gross domestic product ratio below a 3 per cent limit to ensure the smooth operation of the euro currency. But the commission is now predicting the Irish deficit will reach 6.75 per cent in 2009, a quarter of a percentage point more than the Government's forecast.
Under the EU excessive deficit procedure Ireland could in theory face fines if it did not bring its deficit under control. In practice, however, no state has ever paid a fine.
Mr Lenihan said he was glad the EU executive and the Irish people recognised the very grave position of the public finances and the need for corrective action.
"If further action is required it will be taken up until the next budget but that doesn't necessarily mean a mini budget . . . But obviously if further expenditure control measures are required they will be adopted," said Mr Lenihan.
Fine Gael deputy leader Richard Bruton claimed that the commission's "sharp warning" sounded the death knell for the Budget.
"The European Commission has flatly contradicted the Government's recent budgetary forecasts . . . It predicts the public finances will be even worse in 2010 than in 2009. Effectively, the commission has dismissed the Budget's capacity to correct the public finances," he said.