European Commission expects €2.1bn budget adjustment

Monday 23 June 2014 23.01
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Michael Noonan has said the Budget adjustment might be less than €2bn
Michael Noonan has said the Budget adjustment might be less than €2bn
Mr Noonan said it is too early to determine the extent of the adjustment
Mr Noonan said it is too early to determine the extent of the adjustment

The European Commission believes that the Government will still have to make an adjustment of €2.1bn in the October Budget.

This is despite a Government belief that €2.1bn in tax increases and spending cuts will not be necessary to meet the target of reducing the budget deficit to 3% of GDP next year.

However, any plans to cut taxes or increase spending in October's Budget will have to be compatible with Ireland hitting its agreed deficit targets, the commission believes.

Last week in Luxembourg, Minister for Finance Michael Noonan said that "soft data" and anecdotal evidence suggested that an adjustment of €2.1bn would not be needed, although he did not say how much lower the figure would be.

It is understood the European Commission believes that Mr Noonan is not in receipt of any other figures that officials in Brussels are not aware of.

The commission may take action under EU rules if it decides that Ireland has not made a sufficient adjustment in October's Budget.

It is not clear yet how punitive the action could be.

The International Monetary Fund has also said that Ireland should stick to a €2.1bn adjustment.

Despite the warnings in Brussels, the European Commission today said that the economic recovery in Ireland had taken hold and that employment was growing across all sectors.

Its findings are published in its first mandatory surveillance report since Ireland exited the bailout.

Under the rules the European Commission will issue what are called "post-programme surveillance reports" twice a year until 2031, or until 75% of the bailout loans have been repaid.

The report, based on a mission to Dublin by commission officials in April, found that despite the positive outlook there was still a high level of private and public indebtedness in Ireland, as well as a large stock of impaired assets in domestic banks.

The report acknowledges the political pressures the Government is under ahead of the Budget, and it notes that Ireland's fiscal targets are largely on track.

The report warns: "In recent months, and against the backdrop of improving economic conditions, there has been growing political debate contemplating the possibility of cutting taxes and/or increasing spending in the 2015 budget.

"While no concrete measures have been tabled, any plans to cut taxes or increase expenditure would need to be compatible with the agreed fiscal consolidation path."

Ireland's report card, six months after leaving the bailout, is mixed on the performance of domestic banks.

While Bank of Ireland and AIB have returned to profitability and capital levels are healthy, there are concerns over non-performing loans, and over the problem of Permanent TSB's tracker mortgages, which are a continuing drag on the bank's profitability.

The report found that overruns in the health sector were offset by savings elsewhere.

Although Ireland is out of the bailout, the country is still subject to the so called Excessive Deficit Procedure (EDP), which is enshrined in the EU treaty and which is used to force deficit offenders to bring their budget deficits to 3% of GDP.

Ireland, as well as all other member states, is required to send a draft budget to the European Commission by 15 October under EU rules.

Too early to determine Budget adjustment - Noonan

Meanwhile, Mr Noonan has said he is determined to get a Budget deficit below 3% of GDP.

He said that he will do whatever is necessary to achieve that, and said he will have the full support of both parties in Government to do so.

The minister said the question is what size that adjustment should be and the ways and means of arriving at it.

Mr Noonan was speaking in Limerick today at the opening of the Graduate Entry Medical school at the University of Limerick.

He said he believes that adjustment might now be less than €2bn, which was the figure projected last April.

He said the tax take in the first five months of the year was €446m ahead of target, and there will be additional monies from PRSI receipts which go into the Department of Social Protection.

Mr Noonan said all the signs are positive.

However, he added that in previous years the first five months were strong only to fall back in the second half of the year, so it is too early to say exactly what the level of adjustment will be.

He said things are moving in the right direction but that there is absolutely no doubt about his determination to reach the figure of 3%.