EUROPE’S TOP civil servant has said Ireland’s corporation tax policy may lead to further “unpalatable” spending cuts as the Government tries to balance the books without increasing the 12.5 per cent rate.

Catherine Day, the Irishwoman who has been secretary general since 2005 of the European Commission, said the EU authorities have no powers to compel any member state to change tax policy but said the Government would still have to win approval from Brussels for its budget plan.

“Every country can decide its own tax policy, but that is not the end of the story,” she said at a briefing for Irish journalists.

“So if Ireland decides it wants to keep a low corporation tax, it has to deal with the deficit in some other way and we will be saying: ‘Okay, that’s your choice. If you don’t deal with it that way, how are you going to do it?’”

Ireland’s corporation tax policy came to the fore last week when EU economics commissioner Olli Rehn said no tax measures should be ruled out as the Government tries to bring the budget deficit within EU limits by 2014.

The Government insists it will not change the policy but certain EU officials struggle to see how it can bring the deficit below 3 per cent without reviewing the corporation tax rate.

Asked whether the commission can force a state to change its policy, Ms Day said “No, we can’t and we wouldn’t”. In the budget area, “there’s never one answer, but other answers may be more unpalatable”, she said.

“We can’t make Ireland change that, but . . . perhaps public spending will have to be slashed even more severely. But those are national choices that we will not make,” Ms Day said.

“But what we will do, because it is our job to ensure that the euro remains strong, is to say that Ireland and every other member state has to have a credible path to putting its deficit back under control . . . It is for us to say what would work in a European context if a government doesn’t get its public finances under control.”