Dáil Éireann Debate, Wednesday - 9 November 2016
73. Deputy David Cullinane asked the Minister for Finance if he or his Department have had any engagement with EU institutions regarding the fiscal rules since he came into office; the nature of this engagement; and if he will make a statement on the matter. [33887/16]
View answer74. Deputy David Cullinane asked the Minister for Finance if he or his Department have commissioned or developed any papers or strategies on achieving greater flexibility in relation to the application of the fiscal rules; and if he will make a statement on the matter. [33888/16]
View answerI propose to take Questions Nos. 73 and 74 together.
As the Deputy is aware (Parliamentary Questions 20 and 69 of 29/09/2016) the fiscal rules to which Ireland is subject have direct application through a number of EU regulations as well as having domestic legal effect through the Fiscal Responsibility Act 2012 following the passage of a constitutional referendum in May 2012. Changes to these regulations would have to follow the normal EU approach starting with a proposal from the Commission before consideration by Member States and the European Parliament.
I and my Department are active in a number of fora in the EU that discuss the fiscal rules, including the Economic and Financial Affairs Council (ECOFIN), the Economic and Finance Committee (EFC), the EFC-Alternates, the Economic Policy Committee (EPC) and the Output Gap Working Group (OGWG).
The issue of facilitating greater flexibility in the application of the fiscal rules has received significant focus at European level and framed discussions on the establishment of the structural and investment clauses, which were codified by the Commission in November 2015. Specifically these provisions allow for temporary deviations from the required structural budgetary adjustment, subject to strict conditions.
There are also certain more explicit flexibility provisions within the rules. For instance, within the expenditure benchmark pillar of the rules, public investment is granted favourable treatment - as a result of four-year capital smoothing, only one quarter of the increase in public investment must be funded in the first year from within the fiscal space. Furthermore, the fiscal rules aim to facilitate the conduct of counter-cyclical policy, notably via the cyclical conditions matrix.
Moreover, former practice involved reference rates being fixed every three years in the calculation of fiscal space under the expenditure benchmark. In the case of Ireland, this would have significantly supressed the permitted real net expenditure growth rate, since reference rates would have placed greater weight on an outdated outlook when potential growth was considerably weaker. In advance of Ireland entering the Preventive Arm, my officials initiated discussions with the Commission, calling for an annual recalibration of the reference rates and were successful in lobbying to the Commission to this end. This new approach significantly increases the permitted room for expenditure growth, which would not have been possible under the former practice.
Furthermore, in the same period, Ireland gained the endorsement of the EPC on an alternate and more plausible method of calculation of projected working age population growth to be used when estimating potential output, resulting in a 1.0 percentage point improvement in potential output growth for 2017-2020. The impact of these changes were described in Box 10 of the Spring Economic Statement 2015.
My Department continues to progress work aimed at producing sensible estimates of supply-side indicators, the importance of which has been repeatedly highlighted by the Irish Fiscal Advisory Council. A summary of this work has been included in Box 1 of the 2016 Stability Programme Update.
Finally, the harmonised methodology for calculating the economic cycle used in the implementation of the SGP remains an area with limitations within the fiscal rules. My Department has secured useful changes to this methodology over the years by consistently raising concerns and objections at European level. These changes have partially compensated for the reality that the harmonised methodology is not suitable for small open economies. My Department continues to advocate for improvements in the harmonised methodology and will continue to engage constructively on this and other relevant technical issues.
The fiscal rules are designed to promote budgetary discipline and underpin sustainable economic growth. While Ireland's economy is growing and debt is on a downward trajectory, the debt level is still comparably high and caution must be exercised due to the potential of rollover risk should interest rates increase. We are a small and very open economy in a world that has more risks than usual. It makes sense to reach a balanced budget in structural terms by 2018. Reducing our debt to much lower levels will increase our capacity to withstand shocks by building our capacity to borrow. Compliance with the fiscal rules underpins and facilitates this.
