The Government will have to limit spending growth to just 4 per cent in its pre-election Budget if it is to avoid renewed confrontation with the European Commission.
The effective prohibition on another giveaway Budget came when the Commission yesterday published a new round of economic guidelines for EU member-states.
The decision by the Minister for Finance, Mr McCreevy, to ignore Commission guidelines when framing last December's Budget led to an unprecedented censure of Ireland by EU finance ministers earlier this year.
But Mr McCreevy made clear last night that he would be seeking changes to the Commission's proposals, including its renewed demand for action this year to reverse the inflationary impact of Budget 2001. The Minister described the Commission's proposals as merely a first draft. "As in previous years, the final version may be different and will be discussed at a number of committees before the Ecofin meeting of finance ministers in June."
A Government spokesman pointed out that "a lot more consultation has to happen next month between officials". But he added that the "priorities the Commission identifies reflect the Government's own policy priorities for sustaining growth and investment".
In its latest suggested guidelines the Commission is demanding that Mr McCreevy should "improve expenditure control, reintroducing from 2002 clear norms on spending aggregates". This means that the Minister will have to reintroduce his 4 per cent average spending target, which has been effectively abandoned in recent years as spending growth has raced ahead to a current level of 21 per cent.
The guidelines also restate that the Minister should take measures to boost the surplus of revenue over spending "during the current fiscal year". However, Mr McCreevy will argue that changes in overall economic prospects make it difficult, if not impossible, to achieve the same level of surplus which would have been in prospect before the US economic slowdown and the introduction of foot-and-mouth disease controls.
Commission officials acknowledge privately that February's reprimand of Ireland may make it more difficult to persuade EU finance ministers to accept this year's guidelines.
In yesterday's toughly worded text the Commission states explicitly that the Government must introduce "countervailing budgetary measures during the current fiscal year" to offset the effect of last December's Budget. The demand for next year is more open-ended, calling for Budget 2002 to "contribute to an orderly easing of the pace of demand".
The Commission does not specify the nature of the action the Government should take, but officials have indicated in the past that postponing elements of the National Development Plan could have the desired effect. However, the guidelines also urge the Government to "continue to accord high priority to the National Development Plan". This inconsistency is likely to be highlighted by Irish officials at the forthcoming meetings in support of their case for a loosening of the terms of the guidelines.
The Commission predicts that Irish economic growth will fall from 10.7 per cent last year to 7.5 per cent this year. But this figure remains well above the expected growth rate of 2.8 per cent for the EU as a whole.