Had the European Council of Finance Ministers criticised the performance of the Irish economy in the past decade, they would be wrong.

Had they not recognised the contribution made by Irish budgetary policy, they would be very wrong. If, however, the council of ministers had failed to censure Ireland for not setting Budget 2001 in accord with agreed guidelines, they would have been even more culpable.

I don't believe Ireland is being criticised for past performance but because risks are increasing regarding future prospects. I don't believe Europe failed to grasp the exceptional characteristics of the Irish economy or their implications for budget policy.

The broad economic guidelines make sense in Ireland's current circumstances. Failing to censure Ireland would have set a dangerous precedent. Yesterday's decision was no bad thing. A sustained reduction in taxes played a key role in creating the Irish economic boom. It increased the incentive to work and helped moderate wage demands.

But in the past year, the economic rationale for large tax cuts has weakened. Growth in labour supply eased as unemployment dipped well below 4 per cent while wage increases accelerated dramatically. In other words, the favourable "supply-side" effects of budget policy waned noticeably of late.

Although economists may disagree about the strength of the relationship between budget policy and demand in the Irish economy, large tax reductions, accompanied by the fastest rate of increase in day-to-day Government spending since 1982, will have a significant impact on the economy. A substantial boost to demand in tandem with a weaker supply effect, means the recent budget added to overheating risks.

Ireland's overheating problem may not show up in the headline inflation rate this year.

A weakening world economy allied to softer oil prices will outweigh the influence of domestic pressures, but Europe is looking beyond the vagaries of the Irish consumer price index.

Across the spectrum of domestically produced goods and services from houses to haircuts, prices continue to grind higher and a budget that adds more to spending power than to productive capacity will at least underpin this trend.

It is often suggested that without budget largesse, the fabric of industrial relations would have been torn asunder. With strikes now commonplace and 30 per cent wage demands no longer noteworthy, it is difficult to say how Budget 2001 has contributed.

Another "boys in green" argument blames Ireland's high inflation on the weak euro. An examination of the detailed data suggests this is not the full story. Even if it were, there is an onus on the Government to set budget policy in the context of EMU. With interest rates and the euro's exchange rate low relative to Irish economic circumstances, the Government should not add fuel to the fire.

Importantly, Europe is not seeking to extinguish the Irish economic flame. Media reports suggest the European Commission felt Budget 2001 was probably some £400 million too generous. That figure is broadly the amount by which tax cuts reportedly exceeded the recommendations of the Government's tax strategy group.

More significantly, it underlines that Europe is not looking for tax increases or spending cuts. It is not demanding a policy U-turn. All that is required is that the foot be eased gently off the accelerator.

In my view, Irish economic circumstances warrant a reprimand. It is also important for Ireland and other members of EMU that national budget policies are framed in a manner consistent with stability in the euro zone. Admittedly, wayward Irish policy would have no impact beyond these shores, but if Ireland is ignored, soon others will say that Italy "only" accounts for 20 per cent of the euro zone or Germany less than one-third. Clearly, national governments must retain significant budget policy discretion but Ireland and others have greater freedom now than before EMU when financial markets would have severely punished the slightest transgression.

The reality, both before EMU and now, is that Ireland's policy cloth should be fashioned by the prevailing economic climate rather than a political complexion. When circumstances change so should policy.

Austin Hughes is chief economist at IIB Bank