The European Commission has rapped the Government on the knuckles over its use of “volatile” corporation taxes to fund budget increases, a report states.
In its opinion of the Government’s Draft Budgetary Plan, the commission said the Government should have used such “windfall” tax revenues to reduce Ireland’s national debt.
Overall, the commission is of the opinion that the Draft Budgetary Plan is broadly compliant with the provisions of European rules.
However, the Government’s decision to use a large part of volatile, still uncertain tax intakes to allocate additional expenditure in 2016 “is not in line with council recommendations”.
“The European Semester asks Ireland to use windfall gains from better-than-expected economic and financial conditions to accelerate the deficit and debt reduction,” states the report.
The commission has invited Irish authorities to take the necessary measures within the national budgetary process to ensure the 2017 budget will be compliant with strict European rules, known as the Stability and Growth Pact.
The commission also seems to warn against Finance Minister Michael Noonan’s desire to narrow the tax base. “The Draft Budgetary Plan also introduced a wide range of tax expenditure measures which are likely to further narrow the income tax base, thereby increasing public finances’ exposure to shocks,” it says.
The commission has sanctioned a 0.5% “fiscal expansion” across the eurozone next year, in the first signal of a shift in the EU’s policy of austerity
A communique issued today as it launched its autumn economic package in Brussels states, “at this point in time, the commission considers that there is a case for a significantly more positive fiscal stance for the euro area”, though it noted the recovery is not accelerating.
It states that, for member states, the appropriate fiscal expansion could be 0.3% at the lower end of the scale, or as high as 0.8% in some cases.
The development could give the Government more fiscal space in the coming years as it seeks to address demands on the public finances.
In its analysis of the draft budgetary plans submitted by member states to the commission, Ireland’s budget for 2017 was found to be broadly in line with the commission’s Stability and Growth Pact. In contrast, the commission warned eight countries they are at risk of non-compliance with the EU’s economic rules.
The Department of Finance said that in relation to the expenditure benchmark in 2017, the difference between it and the commission mainly arises from a difference on the revenue side in relation to not including the non-indexation of the income tax system as a discretionary revenue measure and their forecast of greater expenditure growth.
“We disagree with this approach and are taking it up with the commission,” said a spokesman.
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