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Irish Fiscal Advisory Council Reports

Dáil Éireann Debate, Thursday - 21 November 2013

Thursday, 21 November 2013

Questions (48)

Lucinda Creighton

Question:

48. Deputy Lucinda Creighton asked the Minister for Finance if he will list, since the Irish Fiscal Advisory Council came into effect in December 2012, the specific number of policy or technical measures assessed by the Irish Fiscal Advisory Council that were not being implemented by him or his Department under section 8(2), (3) and (4) of the Fiscal Responsibility Act 2012 where the Fiscal Council favoured change; the specific actions taken by him or his Department in reaction to assessments by the Irish Fiscal Advisory Council of measures they were not adopting which the Irish Fiscal Advisory Council favoured change; and if he will make a statement on the matter. [49962/13]

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Written answers

I assume that the Deputy is asking me to set out possible actions or recommendations made by the Fiscal Council since December 2012 that were not implemented by me or my Department. As the Deputy may be aware, the Irish Fiscal Advisory Council was established on an interim basis in July 2011 and on a statutory basis in December 2012 under the Fiscal Responsibility Act 2012. The Act was subsequently amended by the Ministers and Secretaries (Amendment) Act 2013 to assign it the further function of endorsing the macro-economic forecasts as set out below, along with the Council’s other functions. These are;

- To endorse, as it considers appropriate, the macro-economic forecasts prepared by the Department of Finance on which the Budget and Stability Programme Update are based.

- To assess the official forecasts produced by the Department of Finance.

- To assess whether the fiscal stance of the Government is conducive to prudent economic and budgetary management, with reference to the EU Stability and Growth Pact (SGP).

- To monitor and assess compliance with the budgetary rule as set out in the Fiscal Responsibility Act. The budgetary rule requires that the Government’s budget is in surplus or in balance, or is moving at a satisfactory pace towards that position.

- In relation to the budgetary rule, to assess whether any non-compliance is a result of ‘exceptional circumstances’. This could mean a severe economic downturn and/or an unusual event outside the control of Government which may have a major impact on the budgetary position.

The Fiscal Council’s most recent Fiscal Assessment Report published in April 2013, is the only assessment report published since December 2012. In this report the Fiscal Council assessed the fiscal stance as appropriate. In addition, the Fiscal Council set out its views in relation to a wide range of macro-economic and fiscal matters. The key points of relevance to the question are set out below:

- In chapter 2 on the assessment of Budgetary Forecasts the Council state:

"While the budgetary outlook has improved, significant macro-economic and public finance risks remain. The Budget 2013 projections assume the delivery of sizable expenditure savings. Achieving these savings, notably in the health sector, will be a key challenge."

The position is that the delivery of the required expenditure consolidation in 2013 is a priority for all Ministers and their Departments. The Department of Public Expenditure and Reform is working with all Departments and Offices to monitor voted expenditure. At the end of October 2013, net voted expenditure was €844 million behind profile. This highlights that in aggregate expenditure is being managed well within the targets for the year.

- In Chapter 3 on the assessment of Compliance with Fiscal Rules, the Council commented:

"The structural budget balance plays a key part in the domestic and EU fiscal rules. However, this poses serious measurement challenges. These need to be addressed both at EU level and by the development of a more comprehensive domestic analysis."

My Department has stated previously that measuring and projecting the structural balance for a small open economy such as Ireland is challenging because it involves unobservable items such as the output gap, the future path of potential GDP and adjusting the deficit for the impact of economic cycle. Structural balance estimates, by their nature, are subject to revision. At EU level, the Commission is investigating alternate model-specifications to improve estimates of the output gap, particularly around turning points in the economic cycle. My Department is working on improving the empirical rigour of its output gap modelling.

- In chapter 4 on the assessment of the Fiscal Stance, the council stated the following:

"The suggested margin of safety has therefore been broadly achieved under the Government’s current plans and so the Council is no longer making the case for €1.9 billion in additional adjustments in this assessment. However, the Council’s assessment is that the planned adjustments of €3.1 billion in 2014 and €2.0 billion in 2015 should not be reduced."

The call for an additional €1.9 billion had been made in the September 2012 Fiscal Assessment Report. Government considered the proposal taking account of the potential impact additional consolidation could have on economic activity. Given the need to protect the emerging economic recovery, it was decided to stick to the previously announced consolidation strategy. In the intervening period, significant changes occurred, including the restructuring of the promissory note. In relation to Budget 2014, the Government did introduce a budgetary adjustment of €3.1 billion including tax increases and expenditure cuts worth €2.5 billion. Government decided to do this to help ensure a continued return to economic growth while also ensuring that fiscal sustainability was demonstrated by targeting a fiscal deficit below the required limit coupled with a small primary balance.

- The Council also stated that:

"Budget-impacting developments will have to be monitored closely, with particular attention paid to any shortfalls in growth and the effective implementation of expenditure-reduction plans."

It should be noted that budgetary outturns for both revenue and expenditure are closely monitored by the Department of Finance and the Department of Public Expenditure and Reform. Outturns for Exchequer revenue and issues are published on the second working day of the following month, thereby ensuring difficulties, if any, will be identified and can be acted upon, if required.

- Finally the Council stated that:

"A robust return to State creditworthiness – which has continued to show the improvement highlighted in the September 2012 Fiscal Assessment Report – would be further reinforced by post-programme precautionary funding arrangements and extensions to the maturities on official loans."

The Government decided on 14 November that Ireland is now in the best position to exit the EU-IMF programme of financial assistance on December 15 without the need to prearrange a new precautionary credit line from our EU and IMF partners. Following a careful and thorough assessment of all of the available options, and various consultations with the European Commission, the ECB, the IMF, the President and members of the Eurogroup, the Governor of the Central Bank of Ireland and the NTMA, the decision was taken to exit the programme without a prearranged precautionary facility or backstop. The Economic Adjustment Programme for Ireland includes a joint financing package of €85 billion which includes contributions from the EU/EFSM of €22.5 billion, and from the euro area Member States/EFSF of €17.7 billion. Agreement in principle was reached at the 12th – 13th April 2013 informal Eurogroup and ECOFIN meetings in Dublin to increase the maximum average maturity of both types of loan by a further 7 years, bringing the total maximum average maturity of the EFSF loans to 22 years, and the EFSM loans to 19.5 years. The 20th - 21st June meetings of Eurogroup and ECOFIN formally approved these extensions. The principal benefits of the maturities extension is the smoothing of our debt redemption profile, the consequent improvement in our ability to fund ourselves in the financial markets and the beneficial impact on our debt sustainability.

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