The Government has played down the implications of a European Commission recommendation that EU countries should increase spending next year in a bid to boost the ailing European economy.

The Department of Finance said it was studying the commission's statement, but stressed the Government would continue "prudent management of the public finances . . . particularly in light of emerging challenges arising from specific external developments such as Brexit or emerging domestic pressures".

Senior sources were sceptical that the commission’s change of policy would enable an expansion in public spending next year beyond what is already planned.

Several Ministers reiterated the Government’s position in the face of escalating trade union demands for public sector pay increases.

However, the move in Brussels on Wednesday, allied to the commission's generally positive assessment of the Irish economy, is likely to increase pressure on the Government when pay talks commence with the public sector trade unions.

The commission has recommended a fiscal expansion of 0.5 per cent across the euro zone next year, in the first sign of a shift in the EU’s policy of austerity.

In a communiqué, the commission said that "responsible growth-friendly fiscal policy" needs to play a bigger role in supporting the euro zone economy, adding Europe could no longer rely on the European Central Bank to spur growth.

“At this point in time, the commission considers that there is a case for a significantly more positive fiscal stance for the euro area,” it said, in order to ensure that a “low growth, low inflation” situation did not become entrenched.

Ireland performed well in the commission's analysis of member states' draft budgetary plans which were also published on Wednesday.

It said the Government’s 2017 budgetary plans, which were submitted to Brussels earlier this year, were broadly in line with commission’s stability and growth pact rules.

Deficit reduction

According to the commission’s analysis, Irish GDP will grow by 3.6 per cent next year, slightly higher than the Government’s projections.

But it questioned the Government’s decision to use a large part of “volatile” tax intakes for additional expenditure, instead recommending that the gains are used to accelerate debt and deficit reduction.

Meanwhile, the Department of Finance has confirmed that half the amount of new money available for Budget 2018 has already been allocated.

Minister for Finance Michael Noonan had said the so-called "fiscal space" for 2018 was €1.2 billion but, pressed by Sinn Féin's Pearse Doherty and Fianna Fáil's Michael McGrath, he said around €673 million is already taken up in carryover costs for tax cuts and spending increases announced in Budget 2017.

Mr Doherty said such a scenario means “the State is in for a serious shock”, given public sector pay demands and spending pressure in areas such as health and housing.

“What the Government has done in trying to satisfy everyone in this year’s budget is spend half of next year’s allocation,” he added.

Mr McGrath said the money available for Budget 2018 could be less again, given the potential impact of Brexit.

“The picture for 2018 is looking a lot tighter than was imagined. There is a distinct possibility the growth forecasts could be downgraded again. Any changes to public pay policy will have to be framed against that backdrop and will have to be affordable and sustainable,” he said.

The centre-left Socialists and Democrats (S&D) group in the European Parliament welcomed the commission's move as a "radical rupture from the past" and a "move away from austerity".

It also applauded the commission’s decision not to punish Spain and Portugal for consistently missing budget targets – a move widely seen as a political response to the climate of growing euroscepticism in some countries.

Speaking in Brussels, EU economics commissioner Pierre Moscovici said the emphasis on fiscal expansion and investment was part of a reflection of the current political climate, where many citizens felt let down by globalisation and are questioning the EU's policy.