The Irish Fiscal Advisory Council says that the plans will not after all break strict European Union rules that insist that countries like Ireland that carry large debts should rapidly pay down their deficits.
Coming less than a month before Mr Noonan delivers what he has termed a “mildly expansionary” budget, IFAC’s views will come as a huge relief for the Coalition and remove a potentially huge political embarrassment ahead of the looming election.
As recently as June, IFAC had effectively put the Government on notice that its budget plans as detailed at that time would break the EU’s “binding” debt-reduction and expenditure cap rules.
IFAC was concerned that the Government, facing into an election, would break the rules at its first test.
The Government ran the risk of repeating the economic mistakes of the past that had helped drive the country into crisis, the watchdog said.
Mr Noonan had laid out plans in the new Economic Statement in April for an expansionary budget of between €1.2bn and €1.5bn.
IFAC had said in June that even a €1.2bn budget package threatened to fall foul of both the “letter and spirit” of EU budget rules.
The watchdog yesterday, however, said that based on recently published CSO figures it has now revised those views and that budget plans will likely comply with the EU strictures.
“We also say very strongly that the Government should not go beyond the €1.5bn,” said Professor John McHale, chairman at IFAC.
IFAC has consistently argued that the Government should comply with the EU rules.
It continues to urge that the budget measures should meet the EU standards, he said.
Its “key message” remains that the Coalition must meet the EU requirements which aim to protect countries from returning to economic crisis.
The rules include a key requirement for Ireland to reduce its so-called structural budget deficit.
Analysts have said that the growth in the economy could mean that Mr Noonan would have as much as €2.5bn in measures to announce in an expansionary budget, if the spending rules did not exist.
Some economists believe that the Coalition, because of the looming election, would be tempted to exceed the limit it had set out in April and spend up to €2bn in budget measures next month.
The economy is now growing at a faster rate than any other country in the eurozone. Official figures published earlier this month showed that industrial output was expanding at a rapid pace in the three months to the end of June.
IFAC was set up at the height of the financial crisis.
It will examine the Government’s macroeconomic forecasts before the budget and will state whether it believes the projections are credible before Mr Noonan details his budget measures.
In November, the watchdog will provide its final assessment of the budget measures, including whether it believes the measures are prudent and in line with EU fiscal rules.