The methodology for calculating the output gap has been the subject of considerable technical discussions at EU level. Changes to the approach by which the output gap is estimated were endorsed by a high-level committee (the Economic Policy Committee) on March 19th 2014. This new methodology will form the revised harmonised approach which the European Commission will apply in their forthcoming Spring 2014 forecasts. It will also form the basis for their subsequent assessment of Member States Stability Programme Updates.
The endorsed changes are technical in nature. Essentially they involve a shift in how labour market slack is estimated. The change alters how structural unemployment is calculated with implications for potential labour supply and the measurement of the output gap. Ireland is one of the Member States for whom this change significantly impacts the estimated level of structural unemployment. It produces a significantly lower estimate of the so called 'natural' unemployment rate for a number of countries (Spain, Ireland and Portugal in particular).
In light of these significant methodological revisions, previous estimates of the output gap now need to be revised. My Department will publish an updated assessment of the output gap path in the forthcoming Stability Programme Update. Fiscal policy was last set out at Budget time and will be re-articulated in the context of the forthcoming Stability Programme Update (SPU).
My Department intends to detail the main methodological features of these output gap changes and will set out the implications for the structural budget balance in the SPU.