The Fiscal Advisory Council has said the planned budget increase of between €1.2bn and €1.5bn is economically prudent, provided the Government fully complies with new budget rules.

In a pre-budget statement, the council said reducing the very high national debt level must remain a top priority to protect the country from future economic shocks.

The FAC warned the Government in June that its budget plan might not comply with EU and domestic rules. 

However, revised economic data from the Central Statistics Office now makes it more likely the budget will comply, according to the council's latest assessment. 

The FAC advises erring on the side of caution by not increasing the size of the budget package beyond the upper limit of €1.5bn, despite extra revenues from a strengthening economy. 

It said those revenues should be used for debt reduction, to help make the economy better able to withstand external shocks like a slowdown in world trade or a rise in interest rates.

It welcomed the Government announcing in April - for the first time ever - the size of the budget increase well in advance, but said the benefits of this new system would be undermined if the Government chose to ignore its own rules and increased the size of the package on Budget day.

It also said changes to tax and welfare rates in the budget should be done in the context of a medium-term plan that clearly takes account of looming spending pressures, particularly from the rise in the number of older people in the population that will occur in the next few years.

The FAC was critical of the April Stability Programme Update (also known as the Spring Economic Statement), saying the budgetary projections for the years 2015-2020 implied a steep fall in the ratio of non-interest government spending to GDP, and did not represent a full picture of the likely costs of demographic ageing and cost pressures in delivering existing programmes. 

It said that "in the absence of offsetting savings, tax cuts would mean an even tighter squeeze on public spending over the coming years than already envisaged in the Government's plan, making it more difficult to fund future current and capital expenditure needs".

It warned that the absence of a well-anchored medium term plan raises the risk that extra revenues from a rising economy will be spent rather than saved, undermining public finances in the medium term. 

The council said that while there is still probably some slack in the Irish economy – it is not producing as much as it could or employing as many as it could before inflation becomes an issue - that slack is likely to be diminishing fast, given the high growth out-turns and falling unemployment. 

This, it said, limits the economic case for a more expansionary budget in future. 

It also said that the debt-to-GDP ratio remains extremely high, leaving debt sustainability vulnerable to adverse growth and interest rate shocks in a volatile global economic context, notably uncertainty over the Chinese economy, the imminent rise in US interest rates, the Greek situation, and conflict in the Ukraine and the Middle East.

Given this, it said the proposed budget package is at the "upper end of the range of prudent policies from an economic viewpoint". 

The FAC is obliged under its statutory mandate to assess whether the Government is in compliance with fiscal rules, and whether its budget plans are conducive to prudent economic and budgetary management. 

It uses an economic analysis that weighs the trade offs between appropriate management of the economy so as to avoid boom-bust cycles against the need to put the public finances on a path to safer levels.