The European Commission has criticised the Government's failure to control escalating rents, and for freezing the amount homeowners pay in local property tax.

In the latest post-programme surveillance report, the Commission has warned against the phasing out of the Universal Social Charge (USC) and questioned the suspension of water charges.

The 50-page report, seen by The Irish Times, praises the “remarkable” economic adjustment made by authorities.

However, it warns of a number of risks – most notably the effect of a British exit from the European Union.

The Commission says the uncertainty created puts a greater premium on prudent management of the economy.

It insists the Government must “balance the demands for spending increases and tax cuts against the need to complete the adjustment, address the housing and infrastructure deficits and to prepare for adverse scenarios”.

Water charges

The Commission says the decisions to decrease personal taxes and to suspend water charges will absorb further resources and “represent an erosion of reforms”.

Government promises to phase out the USC contrast with the commitment to maintain a broad tax base, the report warns.

The levy is a substantial source of revenue and plans to reduce it should be “carefully considered”.

The Commission also notes the “continued uncertainty” surrounding the future of water charges and says abolition will interfere with Ireland’s commitment to the Water Framework Directive.

It says the suspension of charges will have no immediate fiscal impact but there may be difficulties in the years ahead.

It also warns refunding paid charges will have a fiscal consequence.

Any changes to the structure of Irish Water, it says, will also have a financial cost and will negatively affect the operation of the utility.

Ireland is subjected to post-programme surveillance from the Commission until at least 75 per cent of the financial assistance it received has been repaid.

This means it is likely to continue until 2031.

This latest report was sent to the Oireachtas committee on finance for consideration.

In the report is an urgent warning to reform the rental sector. Measures introduced by former minister for the environment Alan Kelly to freeze rents for two years have failed to prevent increases, it says.

The Commission also questions the decision to delay the re-evaluation of property tax until 2019.

It says it was a lost opportunity to broaden the tax base as “residential property prices have increased substantially since the first self-assessment in 2013”.

“Increasing the share of revenue from recurrent taxes on residential property could encourage more efficient land use.”

Risk to banks

In banking the Commission has criticised a

Fianna Fáil

motion, passed by the Dáil, to give the

Central Bank

the power to cap mortgage interest rates.

It claims the measure is discouraging new entrants into the markets and could jeopardise the sale of the State’s shares in the banks.

It says the proposal could have a negative impact on the banks’ “fragile profitability and potentially discourage new entrants to the market”.

“In spite of the CBI (Central Bank of Ireland) indicating that it would be reluctant to use such power, this policy proposal is already undermining investor confidence, as reported by the banks.”

The Commission stresses the banks’ recovery is fragile and could be “severely impacted by a reversal in the macroeconomic environment”.

There are also concerns in the report regarding the inability to control health spending but it praises a deal reached with the pharmaceutical industry which saves the State €700 million.