The European Commission's post programme surveillance report for Ireland says the Government needs to make an adjustment of more than €2 billion in the next budget if it is to bring the budget deficit below 3% of GDP.
Analysing figures from the Government's Stability Programme Update of April, the Commission says that before any policy changes the budget deficit for next year will be 4.2% of GDP, which it says implies a fiscal effort of some 1.5% of GDP to reduce the deficit below 3%.
The Commission says current Government spending is planned to fall by €1.4 billion next year (0.8% of GDP).
It says the Haddington Road agreement will contribute around €200m to this reduction, but says "the amount of other non-pay savings is not clear".
The Commission estimates these extra savings at €700m (0.4% of GDP).
It says an increase in tax revenues of €2.1 billion is largely driven by an increase in the tax base in line with economic growth projections.
New tax measures amounting to some €700m are needed, largely to offset the ending of the Pension levy, which the Commission estimates will cost the exchequer €500m.
The document warns that recent statements and comments by politicians about the prospects of cutting taxes and/or raising spending in light of the improving economic conditions "create expectations that may be difficult to manage".
It says that projects in the Irish Stability Programme and the Commission's own calculations reveal "no room for manoeuvre".
The document also says that while Irish governments have consistently over-delivered the required fiscal adjustment, there "has been a tendency to increasingly rely on both efficiency measures from better work organisation, eligibility controls of social and health care payments, which out-turn is difficult to predict and non-discretionary deficit improving factors, including temporary windfall revenue".
The Commission accuses the Government of being overly optimistic in some budget assumptions, notably believing economic growth will deliver enough tax to avoid the need for painful cuts.
It says, "the projected improvement in economic growth is expected to relieve the need for difficult discretionary measures. In that respect the assumed fairly tax-rich composition of economic growth underpinning budgetary plans appears somewhat optimistic, in particular private consumption and wage growth assumptions".
The Commission is strongly critical of the continuing overruns in health spending - the only part of Government spending that is not under control. It warns that the "implementation risk" in health spending control remains high.
It says slippages in the health sector are a risk to achieving this year’s budget targets, and deserve close monitoring and action.
It also notes that almost half of the planned spending cuts in this year’s budget of €666m were supposed to come from the health vote, but since then some savings have been deemed unachievable by the Government.
The planned saving of €113m from medical cards was reduced to a savings target of €23m in the revised estimate in December.
In May the Health Authorities signalled their inability to deliver savings under the Haddington Road agreement.
Expected savings to overtime and agency workers from longer and more flexible working hours have failed to materialise. The report says "achieving these savings presupposes and effective management and agreement by staff, which is difficult to predict."
An additional slippage relates to the planned replacement of medical cards by GP visit cards for those returning to work, with estimated savings of €10m for 2014.
The repost states "the authorities have now indicated that this measure, which would have required new legislation, will no longer be pursued".
It notes that given the steady decline in the Live Register of unemployed people, the potential savings from such a measure would have been significantly higher for 2015.