The International Monetary Fund on Wednesday warned Ireland against a giveaway budget ahead of next year's general election but backed calls for greater spending flexibility from the European Commission.
"Ireland's recovery is off to a good start and the priority is to maintain solid growth and job creation," the IMF said in a report on the eurozone nation's economy.
"A combination of prudent fiscal and financial policies is needed to support growth while building policy space and private sector resilience to help manage shocks.”
Dublin’s coalition government must call a general election by April 2016 and latest polls show both parties facing a significant loss of seats as anger over tax hikes and spending cuts has boosted support for opposition parties and independents.
This month, both Irish Prime Minister Enda Kenny and Finance Minister Michael Noonan urged the European Commission for more flexibility in EU budgetary rules to allow Dublin to increase investment in its next budget.
"Our position is that the rules should support a budgetary stance for Ireland that correctly reflects both the outturn and prospects for the Irish economy," Kenny told parliament on Tuesday.
Eurozone nations are supposed to keep their deficits under 3.0 percent of GDP, thus the method of calculating the size of the economy and its growth potential is important in determining how much a country can spend in coming years.
Dublin believes that the Commission's methodology doesn't take into account enough of the country's return to fast growth, and thus it should have more room to spend.
Ireland's economy expanded by 4.8 percent last year -- the fastest in the European Union.
The IMF forecasts the Irish economy to grow 3.5 percent this year and 3.0 in 2016.
Welcoming the report, Noonan said "the government is fully aware of the importance of sound budgetary policy in the years ahead, and is committed to a steady adjustment path in reducing debt and maintaining stability."
Ireland was forced to turn to the European Union and the IMF for an 85-billion-euro ($93 billion) rescue in 2010 after a banking crash and the bursting of a property bubble, but regained investor confidence after it cut spending and raised taxes.
Dublin has since made a number of returns to the debt markets at favourable interest rates and last week raised short-term cash at negative yields for the first time in its history.
The IMF loaned Ireland 22.5 billion euros as part of its rescue in 2010, but Dublin has now repaid over 80 percent of those loans early after replacing them with cheaper credit.
The IMF report also warned non-performing loans at Irish banks amounted to about a quarter of all loans, and unemployment, which stood at 10.1 percent in February, is still well above the pre-crisis average of 4.5 percent.