The EU Commission has questioned the Government’s targets for the 2016 budget, saying they do not

take full advantage of strong economic growth.

The commission’s intervention came as it said in a separate study that Ireland’s bailout between 2010 and 2013 was an effective recovery programme and argued the decision not to impose losses on senior bank bondholders was the correct one.

The comments on the October budget came in its review of a post-bailout inspection carried out in the spring.

It said the outline plan to achieve a budget deficit of 1.7 per cent of GDP in 2016 was predicated on €1.2 billion in expansionary measures. While this is at the bottom of the €1.2 billion-€1.5 billion range in the Government plan for the budget, the commission implicitly criticised moves to prepare an expansionary budget.

Buffers

“Reaping the full benefits of the strong growth momentum would avert the risk of pro-cyclical fiscal policy and create the necessary buffers to address future challenges,” said the commission.

“Budgetary windfalls in 2016 and beyond should be used to accelerate debt reduction and prepare for future challenges.

“The stronger than expected economic momentum offers a unique opportunity to make progress with fiscal consolidation and debt reduction and averts the need to support aggregate economic activity.”

It went on to say past experience in Ireland and other countries pointed to a tendency to overestimate economic slack and underestimate overheating in real time.

Demographic pressures

“Moreover, Ireland is also facing considerable expenditure pressures linked to demographics in the medium term and remains vulnerable to economic and interest rate shocks, given the still very high level of public debt. All these elements stress the importance of building fiscal buffers.”

Of the water charges regime, it said the capacity of the Government and Irish Water to explain further the rationale for the reform and demonstrate that the public utility model is best will be critical.

“In turn, payment compliance will be key for Irish Water’s ability to raise revenue and deliver upon its investment programme. Late payment penalties will be put in place, but only in cases where households are in arrears for a full annual billing period.”

In its report on the bailout, the commission said the rescue package was effective in helping Ireland regain access to financial markets and repair its broken banks.

Of the contentious decision not to “burn” senior bank bondholders, it said there was no legal framework and noted the legal and economic risks were considered too great in light of the potential benefits.

“The risks of spill-overs to the Irish and EU financial systems were highly uncertain and perceived to be very high, especially given the absence of a proper EU bank resolution framework,” the report said.

“The alternative of a burden sharing that only applied to the senior creditors of the institutions that were to be resolved, Anglo and INBS, would have had fewer benefits to the Irish exchequer but would still have entailed considerable risks.