EU: No room for large rise in budget spending

The Government faces a “substantial fiscal effort” and despite strong economic growth has little room to increase spending beyond what it has planned for the next few years, the European Commission has said in a key report.

And in specific messages to Government on potential tax measures, the Commission said a “gradual” rise in property tax as early as next year would help prevent big increases in bills when the tax is next valued in 2019. The frozen tax is linked to 2013 property prices, but house prices have already increased significantly.

The commission’s report is a major part of its oversight of spending and revenue plans of governments across the EU in shaping national budgets. Its recommendations carry substantial weight and will be pored over by whoever succeeds Michael Noonan as finance minister as the Government prepares to shape the 2018 budget in the autumn.

The report was published on the day the Government met with trade unions at the start of talks aimed at striking a successor to the Lansdowne Road public pay agreement.

On the State’s finances, the commission said the Government faces an uphill task in shaping its next budget to meet EU fiscal rules. The Brussels’ rules set targets for debt reduction and calculate the so-called fiscal space for spending increases and tax cuts. Meeting those terms will involve “a substantial fiscal effort for 2018”, the commission said in the first of its three main recommendations.

And in what will be seen as an unambiguous reference to the proposed AIB shares sale, it said any “windfall gains” should be earmarked to pay down the national debt at a faster pace.

Some opposition parties and unions have recently said the proceeds of any Government sale of AIB shares — which could amount to over €3bn — ought to be used to build infrastructure and new homes.

And in a significant proposal, the commission recommended the Government tackle mortgage arrears and debt of “viable businesses and households” by writing off debt.

It is believed to be the first time the commission has recommended banks here settle the long-term arrears of their customers through debt “write-offs”.

The commission also urged the Government to focus spending on public transport, social housing and childcare, and help Irish SMEs by providing them with direct support.

The commission said the Government has room to increase “net primary expenditure” by up to 2.4% next year.

A senior source said the overriding message of the report was that the Government had no great room “for dramatic increases” in spending beyond what it had already outlined.

Seamus Coffey, the new chair at budget watchdog, the Irish Fiscal Advisory Council echoed that assessment. “It appears the commission is saying that there is fiscal space, but not a huge amount,” he told the Irish Examiner.

Though seeing no evidence that house prices were overvalued, the commission urged the Government to shape a “spatial plan” that would “help to deliver new homes in the right places”.

Fergal O’Brien, director of policy at business group Ibec, criticised the commission for failing to identify ways in which Ireland could tackle its “chronic level of under-investment in infrastructure”.