Coalition spending plan faces European Commission and European Central Bank reprimand in Brussels

The Coalition last night received only a mild reprimand from the joint forces of the European Commission and the European Central Bank over its late spending splurge this year and its tax-cutting and expenditure increases budget next year.

However, the Irish Examiner understands Brussels will deliver a much sharper rebuke to the Government’s pre-election budget when it publishes its ‘opinions’ next week on draft budgets across the eurozone.

The country officially emerged from its three-year €67.5bn bailout at the end of 2013.

However, the troika periodically assesses the Government’s financial books and last night’s joint report came after staff from the Commission and the ECB completed their week-long assessment in Dublin, the fourth so-called post-surveillance monitoring mission, in the last two years.

Though generally positive, the joint report warned that the Government should not be relying on ballooning corporate tax receipts to fund spending plans.

It said that the additional expenditure the Government announced for spending in the last few months of this year, and the budget package it announced for 2016 “will likely to add to the already very strong growth momentum”.

Just days before unveiling its 2016 budget last month, the Coalition unexpectedly pumped in an additional €1.5bn in expenditure for spending in the last few weeks of 2015. That raised concerns from budget watchdog the Irish Fiscal Advisory Council and other analysts.

Finance Minister Michael Noonan then detailed a further €1.5bn package, consisting of both spending increases and tax cuts, in his 2016 budget.

The EC and ECB last night said that the 2015 spending is being driven by unexpectedly strong tax revenues this year, even though the reasons for the “very buoyant and generally volatile corporate tax receipts” are not fully known at this stage.

On the 2016 budget, the EC and ECB said that the Government could have aimed for an even lower budget deficit target next year if it had used the corporate tax bounty to pay down debt more quickly.

They also noted that its 2016 spending plans will “mainly” boost public sector wages and social spending, even as capital investment as measured against GDP “will further decline”.

The troika members also said the property market requires continuing surveillance. They single out, in particular, the commercial real estate, “especially in light of substantial foreign capital”, flowing into the sector.

Also, non-performing loans on the banks’ balance sheets are still among the eurozone’s highest, hampering the ability of lenders to support the needs of a growing economy. Nonetheless, the tone of the report was generally positive.

“The on-going rebound in economic activity is exceptionally strong, testifying to the successful adjustment of the Irish economy in the past several years,” yesterday’s EC and ECB report said.

“The current very favourable economic and financial conditions give the overnment an excellent opportunity which should be taken to accelerate the reduction of the still high public debt.”

However, the tone of the report from Brussels next week is likely to be more severe. The Irish Examiner understands that the Commission will question more deeply the €1.5bn of additional measures the Coalition allocated for spending this year.