The Fiscal Advisory Council agrees with the Government's view that EU budget rules will force a bigger than necessary spending cut in Budget 2016, and should be relaxed.
In a paper on the so-called Expenditure Benchmark, the council says it supports a departure from the existing rules for the next budget, as long as the Government continues to reduce the deficit.
EU budget rules set limits on how much countries can increase their spending programmes by. The Fiscal Council supports these rules.
However, the application of the rules will cause the Government problems in framing next year's budget, as the current method of calculating the allowable spending increase uses a ten-year estimate of potential economic growth.
This means the current period used includes the very worst years of the recession, like 2009 and 2010.
This has the effect of dragging down the allowable spending increase at a time when actual economic growth is quite strong and could support a bigger spending increase.
The Fiscal Council says it supports a limited departure from the existing expenditure benchmark if the Government complies with some conditions, the most important of which is that it continues to reduce the deficit.
Speaking on Morning Ireland, Fiscal Council Chairman John McHale said changing the base year for calculating the Expenditure Benchmark from 2013 to 2016 would give the Government an additional €700m in allowable expenditure.
Using the current formula, there is effectively no allowable growth in spending.
While it supports the Government's case on spending, the Fiscal Council says there is only limited room for tax cuts in the budget, and argues against them.
It says tax cuts now will lead to future spending restrictions, just when the State will face more spending pressures in areas such as health, education and pensions.
The Fiscal Council says the underlying principle behind the expenditure benchmark is sound - it says spending increases funded out of unsustainable tax revenues such as taxes related to house sales were an important factor in the rapid unravelling of Ireland's public finances from 2008.
The expenditure benchmark aims to prevent a repeat of such a policy mistake.
The council says the issue is not the rule itself, but the "anomalous guidance a purely mechanical implementation of the benchmark would provide for Ireland for 2016".
The issue will only affect the 2016 Budget, which will be presented in October.
At the end of the year the European Commission will recalculate the expenditure benchmark under a regular three-yearly revision process that will apply from Budget 2017 on.
This will result in an increase in allowable spending for Ireland that will benefit the winner of the next election.
Under the current formula the expenditure benchmark is minus 0.7%, but using 2016 as the key year, the Fiscal Council calculates a revised expenditure benchmark of plus 0.4%.
The latter figure implies a smaller cut in the budget deficit.
Prof McHale said the problem is well understood in the European Commission, but a ruling on which base year to use for Ireland’s expenditure benchmark for 2016 is needed some time before the government publishes its Stability Programme Update - a key document in the EU budget co-ordination process - which is due towards the end of this month.
Last week the IMF also came out in support of a more flexible implementation of the rules for the 2016 budget, so as to avoid an unnecessarily tight budget.
While the calculation of the numbers used in the budget rules have some flexibility built in, the Government has to obey the rules themselves - the broad concept was voted into the constitution by the people in a referendum in 2011, and the details were implemented in domestic law in the Fiscal Responsibility Act of 2012.
