The government is likely to be advised to make more than the planned cuts in next year’s budget when the European Commission gives its opinion on the draft budget for 2015 today.
EU sources said they are taking into account the report from the troika when they visited Dublin earlier this month and warned about both the country’s debt and the deficit, despite more progress being made than originally expected.
The Commission and the ECB’s report said that they expected the general government deficit this year to be around 3.7% - well below the original target of 5.1%.
But the IMF warned that the deficit may be over 4% of GDP this year and “remains too large to put Ireland’s high debt firmly on a downward path”.
The government expects to easily reach next year's target to to cut the deficit to under 3%. But the IMF says that the draft budget makes less progress than desirable and should result in an adjustment of about a half percent of GDP in structural terms.
While the government has said that it will reduce the top rate of tax from 52% to 50%, both the Commission and the IMF advise that any additional savings to come from the budget should be used to lower the deficit next year.
The Troika remarked “More ambitious deficit targets for 2015 and 2016 would help to bring the still very high government debt-to-GDP ratio firmly on a downward path. The government needs to stand ready to adopt additional measures to address potential future fiscal risks.”
They also commented that “the debt overhang remains a significant challenge to the economy, calling for sustained fiscal consolidation and financial repair.” Getting the debt of around 117% down to 60% however could take decades.
Ireland is one of six countries in the excessive deficit procedure with Portugal, Spain and France because both its debt and the government’s budget deficit are higher than prescribed under the EU’s budget rules.
The main point of interest will be France and Italy that have both failed to take the advised action but rather than immediately threatening them with sanctions, they will be given until March when the Commission will assess whether the reforms they have promised are having the necessary effect.
The Commission also present sits annual growth survey and the alert mechanism report today. The growth survey sets out the general economic priorities for the EU and provides member states with policy guidance for the following year.
Member states comments on the survey and report are taken into account by the Commission in its recommendations to each country in the spring.
Ireland, as a post programme country, continues to have its budgets under more detailed scrutiny than other euro area countries and this will continue until 75% of the bailout funds has been repaid - which could be decades.
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