DUBLIN (Reuters) - An independent fiscal watchdog created as part of Ireland's IMF/EU bailout deal on Wednesday called for the government to slash its long-term budget deficit target to give investors additional assurance its debt is sustainable.
The five-man Irish Fiscal Council said the budget deficit should be cut to 1 percent of gross domestic product by 2015 from a current target of 2.8 percent, a move that would require additional cutbacks and tax increases of 4 billion euros (3.5 billion pounds).
The government, which is not bound by the council's advice, said it would examine the recommendations, but would remain "prudent" to avoid undermining growth.
"There is a lot of risk and given how essential (it is) that debt sustainability be achieved ... there are advantages to going in with some extra insurance," council head John McHale said. "Doing this early would yield strong returns."
The Fiscal Advisory Council said the targets set out under the EU-IMF deal were appropriate at the time, but that Ireland's growth forecasts had been downgraded since then to reflect concerns about the global economic situation.
To meet the current target of a deficit of 8.6 percent in 2012, the government will have to increase its planned adjustment from 3.6 billion to 4.0 billion euros, it said.
But to put its finances on a firmer footing, the government should increase its 2012 target to 8.4 percent, which would require cutbacks and tax increases totalling 4.4 billion euros.
Finance Minister Michael Noonan said he thought a budget adjustment of "a little more than 3.6 billion" euros would be enough to reach a 2012 deficit of 8.6 percent, but warned against going further.
"I think we have to be prudent," Noonan told journalists. "We've had two continuous quarters of growth for the first time in three years and you don't want to hit demand."
Ireland is on track for a budget deficit of 10 percent of GDP this year.
In the medium term, lower budget deficits would give the government a buffer against shocks that could undermine plans to cut the debt to GDP ratio, which the EU/IMF deal forecasts will climb from 111 percent in 2011 to peak at 118 percent in 2013, the council said.
A 2 percent cut to expected growth would cause debt to spiral to around 130 percent and keep growing, it said.
McHale said in the current euro zone debt crisis, peripheral countries were being divided into those which were insolvent and those which were illiquid.
"There is still quite a lot to play for here and there is incredible importance (in) being on the right list," he said.
The fiscal council report also called on the government to refrain from pledges to ring-fence certain areas from cuts. The government has said it does not plan to reduce social welfare rates, public sector pay levels or increase income tax rates.
The government will publish its pre-budget outlook at the end of this month, which will state the amount of cutbacks and tax increases required and update its growth forecasts.
The International Monetary Fund has told authorities in Dublin to stick to the existing 2012 deficit target of 8.6 percent of gross domestic product but the European Commission wants them to push harder.
Reporting by Conor Humphries; Editing by Carmel Crimmins and Catherine Evans