By Padraic Halpin

By Padraic Halpin

DUBLIN (Reuters) - Ireland's "remarkable" progress in fixing its public finances slowed this year and budget plans for 2017 that exhausted all available tax revenue leave it vulnerable to shocks, the European Commission and European Central Bank said on Friday.

The caution from the two institutions, who, along with the IMF monitor Ireland twice a year as part of a 2010-2013 bailout, followed a similar warning from the country's fiscal watchdog this week that the government's fiscal prudence was slipping.

While its budget deficit is forecast to fall below 1 percent of gross domestic product in 2016, Ireland's fiscal council said Dublin failed to comply with EU fiscal rules in 2016 and another breach is implicit in its projections for 2017.


They and Ireland's bailout lenders fear a failure to further bolster the public finances and adhere fully to the rules could see the progress unravel if the economic outlook deteriorates, particularly over neighboring Britain's vote to leave the EU.

The fiscal council said the budget plans for next year breach a key plank of the EU's Stability and Growth Pact, the expenditure benchmark, by 200 million euros.

Like the fiscal council, the ECB and the Commission also criticized Ireland for using a large part of over-performing, but partly volatile, proceeds from corporation tax receipts to fund additional spending this year, instead of saving funds to buffer the economy in the future.

"Ireland's fiscal adjustment has been remarkable but slowed in 2016," the European Commission and ECB said in a joint statement following their sixth post-bailout review of Ireland.

"While broadly compliant, the draft budgetary plan implies a risk of some deviation from the required adjustment (under the fiscal rules) in 2016 and 2017. Increased external uncertainty puts an even greater premium on prudent fiscal policy."

The increased risks, which they said stem from Brexit and uncertainty over the future evolution of multinational firms' activities in Ireland, have put some clouds over otherwise bright economic prospects.

Ratings agency S&P also forecast continuing strong, though moderating, economic growth for Ireland on Friday and said that the negative impact of Brexit will be manageable as it kept its rating of Ireland at 'A+/A-1' with a stable outlook.

"The stable outlook balances our view of upside potential for the ratings over the next two years if Ireland's fiscal improvement exceeds our expectations, against downside risks associated with external factors," S&P said in a statement.

Responding to the two reports, Finance Minister Michael Noonan said they affirmed that Ireland's economic prospects remain bright but that the government must remain vigilant and continue its prudent management of the economy.

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