I propose to take Questions Nos. 185 and 186 together.
Under the Stability and Growth Pact (SGP), Ireland is obliged to be at or make rapid progress towards its Medium Term Objective (MTO) of a balanced budget in structural terms. This obligation also stems from the Fiscal Compact, to which Ireland acceded following the referendum in 2012, and has also been enshrined in domestic legislation through the Fiscal Responsibility Act 2012.
As Ireland is not yet at its MTO, it must improve its structural balance by more than 0.5% of GDP per annum until the MTO is reached. In the Country Specific Recommendations (CSRs) adopted by the Council on 14th July 2015 an improvement of 0.6% was stipulated for 2016. The forecasts in the Budget for subsequent years were based on a minimum annual structural improvement consistent with the table below.
The required adjustment for 2017 will be set in the CSRs to be adopted by the Council next July on the basis of a European Commission recommendation. The Commission has clarified over the last year the basis on which it will make its recommendation for an appropriate improvement in the structural balance for each Member State. Its analysis takes account of the debt-to-GDP ratio, the size and sign of the output gap and whether the economy is growing faster than potential. The matrix describing the required structural adjustment based on these criteria has been published by the Commission and is outlined below. The rationale for the differentiated approach is to better align the required fiscal adjustment with the prevailing economic environment.
Matrix for specifying the annual fiscal adjustment towards the Medium-Term Objective (MTO)
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Required annual fiscal adjustment*
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% GDP
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Condition
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Debt below 60 and no sustainability risk
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Debt above 60 or sustainability risk
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Exceptionally bad times
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Real growth < 0 or output gap < -4
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No adjustment needed
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Very bad times
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-4 output gap < -3
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0
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0.25
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Bad times
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-3 output gap < -1.5
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0 if growth below potential, 0.25 if growth above potential
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0.25 if growth below potential, 0.5 if growth above potential
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Normal times
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-1.5 output gap < 1.5
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0.5
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> 0.5
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Good times
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output gap 1.5
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> 0.5 if growth below potential, 0.75 if growth above potential
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0.75 if growth below potential, 1 if growth above potential
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Accordingly the minimum level of the required improvement in the structural balance is set for each Member State in the CSRs addressed to them by the Commission and Council in accordance with the above matrix of requirements.
Projections in Budget 2016 provide for the cost of demographic pressures and the public capital plan over the period to 2021, together with the cost of the Lansdowne Road agreement to 2018. The implied pace of structural adjustment, consistent with these assumptions is set out in the Budget document. Were Ireland to pursue an annual structural adjustment below the level stated in the Budget, in terms of a broad order of magnitude each 0.1% would translate into about €67 million of fiscal space in terms of additional permitted spending each year under the expenditure benchmark. It should be borne in mind, however, that any additional fiscal stimulus would have an economic impact, which would in turn, impact the level of fiscal space available.