The credit ratings agency Standard & Poor’s says the formation of a minority Government may lead to the diversion of funds from important public spending projects towards "local projects that have lower economic priority", in order to secure the support of Independent TDs.
In a note which left its credit rating of the Irish Sovereign unchanged at A+ (with a stable outlook), S&P says ongoing public sector wage pressure and persistent overruns in the health services are "expected to squeeze out the capital expenditure that is needed to support future economic growth".
This, it says, is because overall spending is subject to the "expenditure benchmark" rule of the EU's stability and growth pact, which limits the amount of money the Government can spend in any budget year.
With more pressure for current spending, the ratings agency fears a continuation of the pattern of recent years of cutting capital spending to meet short term current spending needs.
This undermines the capacity of the economy to grow over the medium and long term.
It points the finger at the minority Government, saying that while it expects fiscal consolidation to continue, it will not be as fast as in recent years, nor as fast as the Government programme envisages.
It also highlights a number of risks it sees with the structure of the budget, particularly an increased reliance on more volatile revenue sources (such as corporation tax), and failure to re-orientate public spending towards "growth-enhancing components".
It says reform fatigue among the population has led to a decline in support for traditional political parties and an increasing political fragmentation.
As a result it expects slower implementation of supply-side policies, such as infrastructure investments and the reform of health and social welfare, and a deteriorating quality of public spending.
S&P expects the sale of bank shares held by the Government to be delayed further, "contributing little to debt reduction in our timeframe".
On Brexit, S&P says the impact on Ireland of a UK vote to leave the EU would be negative - "at least in the short to medium term, but of uncertain magnitude, and mixed across sectors", noting that the sectors that serve the UK economy are on average more labour intensive, and any shocks from Brexit could damage the Irish labour market.
It says other risks associated with Brexit include the weakening of the UK's financial services sector, which Ireland's financial sector is closely connected to, and the potential ripple effect for lower demand from the rest of the EU.
It could also result in a lack of clarity in the political relationship between the two countries, increasing uncertainties related to trade and investment between the UK and Ireland.
S&P said it does not believe the potential relocation of some UK businesses to Ireland would "fully offset the overall negative impact of Brexit in the short to medium term".
