The Minister for Finance, Mr McCreevy, has warned that he may have to choose between trimming current expenditure and shelving ambitious infrastructure projects unless the rules of the Stability and Growth Pact are relaxed.
In Brussels after a meeting of EU finance ministers, Mr McCreevy said the stability pact rule obliging euro-zone countries to bring their budgets close to balance was "a little bit severe" for Ireland's conditions.
He said he intended to maintain capital expenditure at 5 per cent of GNP for the foreseeable future but that such a commitment was made difficult by the "close to balance" requirement.
"If that's going to be kept at that level and there are other budgetary matters, it means that levels of current expenditure would have to be reduced," he said.
Mr McCreevy said that, although the 7 per cent increase in current spending envisaged for this year was low by the standard of recent years in Ireland, it was high by EU standards. He said it would be realistic to expect increases of around 4 per cent in future years. "We have to get back to the situation of tempering our expectations," he said.
The Minister defended Ireland's high level of capital expenditure - one of the highest in Europe - as a necessary measure to overcome infrastructure weaknesses and improving competitiveness.
"Over the next seven years, if we can keep a level of 5 per cent of GNP, you will see a massive change in infrastructure in the country," he said.
The Economic and Monetary Affairs Commissioner, Mr Pedro Solbes, has called for a more flexible application of the Stability and Growth Pact, a position supported by Ireland and Britain. But Mr McCreevy acknowledged yesterday that most EU member-states were opposed to the plan.
Finance ministers will discuss the reform proposals again next month and EU leaders are expected to make a final decision when they meet in Brussels in late March.
The ministers discussed a proposal by the European Central Bank (ECB) to reform the voting system on its governing council when new member-states join the euro zone. Under the plan, voting rights on the governing council, which sets euro-zone interest rates, would rotate, giving big countries a right to vote more often than small ones.
Under the current proposal, Ireland would fall into the middle range of countries, voting at 57 per cent of the meetings. Mr McCreevy said that, although it was important that the issue should be decided soon, there was no agreement among finance ministers. "A lot of countries are not delighted. My own view is that we can live with it," he said.
The ministers approved Ireland's Stability Programme for 2003 without discussion, but they warned Britain that its budget deficit could rise too high if economic growth did not live up to London's optimistic forecasts.
