Ireland’s case to get some changes in the way EU budget rules apply to Ireland has been backed by the International Monetary Fund.

Its latest annual report on Ireland also says that there may be a need to raise further tax revenues in the years ahead, suggesting more revenue from VAT and higher property tax bills based on rising home prices.

The Government has argued that the way EU budget rules are calculated for Ireland is not realistic and is hoping to get some changes agreed.

The budget rules now start to apply to Ireland, as we have left the bailout programme. The IMF supports the government’s case in its report, published on Wednesday, saying that its staff “ welcomes ongoing work by the Irish authorities to refine some aspects of the EC methodology.”

Progress in these talks could offer more leeway in October’s Budget, allowing some new tax and spending measures. The IMF also warns that the Government must pursue a cautious policy and continue to cut the budget deficit . Ireland should aim to move towards a balanced budget – allowing for the economy cycle – within three years, according to the IMF.

It says that this will require a continued focus on value for money in public spending and warns that any public pay increases must recognise the very tight constraints facing the public finances. It also calls for better value for money in health spending and consideration of the taxation of child benefit and the restriction of availability of medical cards for over 70s.

The IMF also says that the Government should be prepared to raise new revenues. It could raise more from VAT without raising the main rate, it suggests, while maintaining up-to-date property valuations could increase the revenue from the property tax. More funds could also be raised from carbon tax, it sai,. Any once off revenues should be used to pay down debt, the report argues.

More progress is also needed in addressing mortgage arrears, the IMF says, calling on the Government and the Central Bank to maintain pressure on banks to negotiate durable solutions with borrowers, including taking court action where needed.

The IMF takes a generally upbeat view of growth prospects, though its GDP forecasts are a bit below those of the Government. It expects GDP growth of 3.5 per cent this year and a gradual easing of the annual growth rate to 2.5 per cent in later years. It says the biggest danger to Ireland is if economic growth disappoints, pushing up the debt burden, particularly if budget targets are not met.