Ireland should intensify its effort to reduce the budget deficit in the period leading up the next election and beyond, the European troika bodies have urged.

The intervention by the EU Commission and the European Central Bank came as the International Monetary Fund said Budget 2015 “makes less progress than desirable” and added that a somewhat faster pace of deficit reduction would have been preferable.

Senior officials from each of the institutions were in Dublin this week for their second post-bailout inspection of the Government’s affairs .

Although the European bodies and the IMF recognised Ireland’s economic recovery is strengthening, they warned respectively that “important challenges” and “major uncertainties” remain to be overcome.

The troika mission, routine for countries after they exit bailouts, came as the Government sought to put the water debacle behind it with the introduction of a flat charge for water usage.

With a political relaunch imminent of the package of income tax cuts to be introduced in January, the troika bodies adopted a cautious tone in two separate statements at the end of their visit.

Macroeconomic adjustment

The commission and the ECB said in joint remarks that the macroeconomic adjustment process needs to continue, despite the significant progress made.

“Unemployment – particularly long-term and youth unemployment – remains high. Deleveraging of public and private debt is progressing, but the debt overhang remains a significant challenge to the economy.” said the commission and the ECB

The European bodies expect the the Government to achieve a budget deficit below 3 per cent of economic output next year as required under EU agreements. However, they said the Government needs to stand ready to adopt additional measures to address potential future fiscal risks.

Weeks after the introduction of an expansionary budget for 2015, this implicit call for a deeper deficit cut next year and in 2016 received a frosty response in Government circles.

“It’s difficult to comprehend people telling us to cut faster when we’re exceeding all deficit targets and have the fastest growing economy in Europe,” said a Minister in response to the European statement.

IMF mission chief Craig Beaumont said Ireland “has enjoyed a year beyond all reasonable expectations” but added that the Government should stick with the proven strategy of steady and measured fiscal adjustment.

Uncertain growth

“Why? Growth prospects in coming years are still very uncertain . . . while the US and UK economies are doing well, euro area growth remains weak and subject to downside risks,” Mr Beaumont said.

The IMF and European statements came after a source close to the commission expressed concern that the new water regime could jeopardise fiscal planning, remarks which were poorly received in Government Buildings.

At issue is whether the commission’s statistical division, Eurostat, allows the debts of Irish Water to go off the State’s balance sheet in a ruling next April.

Taoiseach Enda Kenny said yesterday that the new scheme would meet Eurostat’s criteria.

“We are very happy that the scheme put forward is predicated on passing the market corporation test as defined by Europe so their only involvement here now is for statistical purposes only,” the Taoiseach said.