Ireland says improving economy will let government spend more

By Conor Humphries DUBLIN (Reuters) - Ireland will have more resources than expected to fund spending increases and tax cuts in its next budget, Finance Minister Michael Noonan said on Wednesday, a development that could smooth the formation of a new government. Stronger than expected economic growth and tax receipts combined with a tweaks to EU rules means the government will have at least 900 million euros (698 million pounds) at its disposal when it prepares its 2017 budget later this year up from an earlier estimate of 500 million, he said. That is still significantly less than the 1.5 billion euros the government had at the last budget, though Noonan said it may yet be revised upwards before the budget in October. The extra resources could give acting prime minister Enda Kenny's Fine Gael party more leeway in talks with independent members of parliament to support a minority government following an inconclusive national election on Feb. 26. The deputies have been looking for additional spending on health, policing and infrastructure, which some commentators have suggested were unaffordable. A senior minister on Wednesday said "great progress" was made in parallel efforts to convince the second largest party Fianna Fail to abstain in key votes to allow Kenny to form a minority government. Ireland's finance department on Tuesday upgraded its 2016 economic growth forecast to 4.9 percent from 4.3 percent, which would likely make the economy the fastest growing in the European Union for the third year in a row. But Noonan said external risks had intensified since his department's last update in October, including Britain's referendum on whether to remain in the European Union. "While the short-term prospects are positive, it is also clear that there is considerable uncertainty at present," Noonan said. "As a small and open economy we must be cognisant of each of these risks." The Central Bank also urged caution. "The legacy of the private sector debt and sovereign debt is still high so all plans should be robust to disappointing news," Central Bank Governor Philip Lane told a news conference for the release of the bank's annual report. The bank is to pay 1.8 billion of its profits to the state to cut the national debt, which Noonan said was set to fall to 88 percent this year. Unemployment is expected to fall to 8 percent by the end of the year, down from a high of 15 percent in early 2012 in the wake of a devastating property and banking crash. (Additional reporting by Padraic Halpin; Editing by Andrew Heavens)