Dáil Éireann Debate, Wednesday - 16 November 2016
104. Deputy Pearse Doherty asked the Minister for Finance his views on the ESRI's assertion that the structural deficit may be overstated due to a failure to adequately capture housing market developments. [35427/16]
View answerAs we are now all too aware, given the bursting of the property bubble, the interplay between volatile house prices, tax revenues and the impact on sustainability of the public finance has been problematic for Ireland.
I am aware of the May 2015 analysis published by the ESRI 'Assessing the sustainable nature of housing-related taxation receipts: The case of Ireland'. This relies on estimates of fundamental house prices to determine the extent of over/undervaluation, something which is unobservable and problematic. The authors suggest that partly as a result of undervaluation over the years to 2010 to 2014, declines in tax revenue fell below estimated fundamental levels. All else equal, they maintain this may result in an overstatement of the structural deficit.
Given the recovery in house prices since the paper was published, however, the extent of undervaluation is likely to be notably reduced, along with any corresponding over-statement of the structural deficit.
The structural balance is unobservable and must be estimated by statistical techniques. Whilst conceptually, the notion of removing cyclically-sensitive elements from the budgetary position is appealing, its measurement is extremely complex in the context of small open economy such as Ireland.
For the purposes of the Stability and Growth Pact, the structural budgetary position for Ireland along with all Member States is assessed by the European Commission on the basis of the commonly agreed EU-wide methodology. This is provided for in legislation. Whilst the methodology broadly captures the sensitivity of specific taxes to underlying macroeconomic developments, it does not explicitly incorporate housing market developments.
While there are undoubtedly issues with this methodology for Ireland, and these have been highlighted by my Department, work continues at a European level to improve it and make it more applicable for small open economies. Moreover, for domestic purposes, my Department has looked at alternative methodologies directly incorporating inter alia both house price and credit movements, and some work in this area has been published.
