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Irish breach of budget rules heightens risks over Brexit - watchdog

DUBLIN (Reuters) - Ireland failed to comply with European Union fiscal rules last year and another breach is implicit in its projections for 2017, leaving the economy more exposed to the potential shock of Brexit, the country’s fiscal watchdog said on Wednesday.

A scrabble board spells out Brexit in Dublin, Ireland May 4 2016. REUTERS/Clodagh Kilcoyne

Ireland is widely seen as the EU economy with most to lose from the vote of its near neighbour and key trading partner Britain to leave the bloc, making Dublin’s apparent “limited commitment” to budgetary rules a concern, the Fiscal Advisory Council said.

While its budget deficit is forecast to fall below 1 percent of gross domestic product in 2016, Ireland’s structural deficit - which strips out business cycle effects and one-off revenue and spending -- is estimated to fall by 0.3 percent rather than the 0.6 percent improvement demanded by EU rules.

For 2017, the government is set to breach the other key plank of the EU’s Stability and Growth Pact, the expenditure benchmark, by 200 million euros, the council added.

“It is of particular concern when you actually set out a plan that doesn’t involve compliance,” Council chairman John McHale told a news conference.

“The budget framework really does seem to be under strain. There has been slippage and the extent of that slippage has been increasing. If this is going to be the pattern, then it would seem that we really haven’t learned those lessons of the past.”

McHale said there was also a question of the extent to which the European Commission is enforcing the Stability and Growth Pact and a concern over whether the rules are robust enough.

The EU executive has deemed Ireland’s draft budget for 2017 as “broadly compliant” with the rules and McHale said Dublin would have to commit an expenditure benchmark breach six times greater than forecast before facing any sanctions from Brussels.

“But the reason for sticking to the rules is not because Europe says so - the fact the Commission don’t seem to be too aggressive is not the point - they are there for our benefit. It’s a lesson we learned from the crisis,” McHale said.

“We seem willing to row back from the strong sense that we were going to operate budgetary policy differently, and there is a danger that you can get on a slippery slope once you start having certain deviations to the rules and get away with it.”

Editing by Gareth Jones