Tuesday, 17 November 2015

Questions (208)

Pearse Doherty

Question:

208. Deputy Pearse Doherty asked the Minister for Finance the expected fiscal space permissible in each of the next five years and cumulatively over this time; and the main factors that might cause these parameters to change. [40436/15]

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Written answers (Question to Finance)

Estimates of the gross and net fiscal space for the period 2016 to 2021 can be found in Tables A8 and A9 on pages C.50 and C.51 of the Budget 2016 book - http://www.budget.gov.ie/Budgets/2016/Documents/Economic%20and%20Fiscal%20Outlook%202016.pdf.

As the use of the available fiscal space for 2016 was set out in the Budget, I assume the Deputy is seeking information for the period from 2017 to 2021.  For the convenience of the Deputy the gross and net fiscal space for the period 2017 to 2021 is set out in the following table.

€ billions

2017

2018

2019

2020

2021

Total

Gross fiscal space

1.3

1.5

1.6

3.2

3.3

10.9

Net fiscal space

0.5

1.1

1.3

2.7

2.9

8.5

Table A9 shows the walk from gross fiscal space to net fiscal space. The former is simply the permitted fiscal space arising from applying the currently forecast benchmark growth rates to the projected expenditure aggregate for each year. These amounts are not final and are based on projections for the GDP deflators, reference rates and convergence margins for each of the relevant years as set out in Budget 2016 (see Table A.8). The actual GDP deflators, reference rates and convergence margins values used by the Commission to assess compliance with the rules each year beyond 2016 will be based on Commission estimates compiled in their Spring forecast, and in relation to the GDP deflator, the Autumn forecasts as well, each year.

A further source of variance arises from the fact that the various factors are applied to the general government expenditure outturn, excluding some items such as interest and the level of cyclical unemployment expenditure. With regard to cyclical unemployment, the Commission's estimates are based on their own data. Therefore, outturn variances from the levels forecast in Budget 2016, which is likely in the course of implementation and due to the allocation of fiscal space to expenditure, is another source of uncertainty, albeit with a relatively limited impact.

In the year after a Member State reaches its Medium Term Objective (MTO) set under the balanced budget fiscal rule, the convergence margin requirement under the expenditure benchmark ceases.  As outlined in Table 11 on page C.23 of the Budget 2016 book, my Department forecasts that Ireland will reach its MTO in 2019 and, as a result, the convergence margin would not be applied to the expenditure benchmark calculation from 2020 on. This leads to a significant increase in the projected fiscal space from 2020 onwards.  If the MTO is reached in 2018, then the convergence margin would cease to apply in 2019.

The net fiscal space is the additional room available beyond spending assumptions included in the Budget's baseline spending projections whilst still complying with the upper limit posed by the Expenditure Benchmark. Net fiscal space takes account of baseline expenditure projections as set out in Table 10 on page C.22 of the Budget book. These assumptions, which are set out in Table A9, include the annual cost of providing for demographic spending pressures together with a number of other anticipated elements such as the Public Capital Plan, the cost of the Lansdowne Road Agreement and a number of other calls on the Central Fund.  The annual cost of indexing the tax system at an annual full year cost of c. €400m per annum is included in the baseline tax revenue figures in Table 10. For illustrative purposes, the additional revenue generated from a political decision to not to proceed with indexation is included in the discretionary revenue measures set out in Table A9. Decisions on whether to proceed with indexation or introduce other tax measures each year will be a matter for decision by the government of the day.

On the basis of the above assumptions, gross fiscal space for 2017 to 2020 amounts to a cumulative €10.9 billion and net fiscal space amounts to a cumulative €8.5 billion.  Should taxpayers benefit from indexation of the tax system proceed as assumed in the revenue forecasts, then the net fiscal space would be reduced by c. €400 million in each relevant year.

Beyond the provisions set out above, the available amounts of net fiscal space could potentially be used by the government of the day to reduce debt, to fund tax reductions or to finance spending increases.