Finance minister Paschal Donohoe yesterday pushed back on calls by the Tánaiste for developer tax cuts.

This week, incoming Taoiseach Leo Varadkar said that he wants to introduce tax incentives to make it "viable" for developers to keep building amid rising costs.

He also called on the Department of Finance to have a 'more open mind' on tax and housing developments.

Mr Donohoe was warned in August that such measures were costly to the State and have a "limited effect" on supply.

When asked about the Fine Gael leader's comments yesterday, the Finance Minister said the Government needed to be "very, very careful" when it comes to ramping up tax relief in the sector.

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"The department of course will always consider options that are there to look at how we can support the delivery of more homes in our country," Mr Donohoe said.

"As has been evidenced in the Budget that I've just done, and all of the other budgets over recent years, I believe we need to be very, very careful with the growth of tax relief into our property sector, unless we're confident that they can deliver more homes.

"I continue to believe that expenditure and grants and supports, and supporting organisations like the land development agency, are the ways in which we can accelerate the delivery of more homes. But... of course we have to consider what options there are regarding how we can deliver more homes.

"Of course I know we have to do better and get more homes built in our country. But as I've argued now for many, many years, we have to take great care about the development of new tax reliefs."

Mr Donohoe noted that "huge amounts of capital" have already been given to private sector firms to support the delivery of homes.

Previously, officials in Mr Donohoe's department warned him that using tax breaks to stimulate housing supply had been "a contributory factor to the financial crisis".

Documents obtained, which were prepared for the Minister for Finance in the run-up to the Budget, show that officials were skeptical about the kind of tax breaks that were suggested by Mr Varadkar.

A note in August, prepared by the Economics Division of the department, acknowledged that tax incentives for developers and investors had previously played a role in improving the physical and economic environment.

But the note added: "However, experience shows that there is potential for significant distortions including an inefficient allocation of resources; inflation; regressive taxation; rent seeking by vested interests; and significant public cost."

The note said it would be difficult to remove "any such intervention" once introduced. "The issues facing the residential sector are structural in nature. Structural problems cannot be solved with temporary solutions."

It found that, between 2004 and 2009, such schemes attracted almost 60,000 applicants, with a potential cost to the exchequer of €1.95bn.

In their conclusions, the officials noted that using tax incentives to stimulate housing supply is "often poorly targeted, costly to the Exchequer and was a contributory factor to the financial crisis in Ireland".

The note added that tax breaks will have limited impacts on supply if supply is being constrained by non-fiscal barriers.

A spokesman for Mr Varadkar said the matter of "speeding up construction" will "continue to be discussed by the party leaders in the weeks and months ahead".

Senior government sources acknowledge that tax breaks for developers would likely be controversial. But there is an acceptance that the Government needs to get as many houses built as possible before the next election.

A spokesman for Taoiseach Micheál Martin said at a post- Cabinet meeting that it was something that would have to be "discussed at a whole-of-Government level".