Estimating the cyclical position of the economy has become increasingly complex, in large part because of distortions to GDP arising from activity in the multinational sector. This has resulted in a strongly positive output gap this year, which impacts on the assessment of compliance with the medium term budgetary objective (MTO) of a structural deficit of 0.5% of GDP. It is projected that Ireland will meet its MTO in 2019.
As outlined in Table 2 of the 2018 Summer Economic Statement, the structural deficit for 2018 and 2019 is projected to be 0.9% and 0.4% of potential GDP, respectively.
The Government is committed to establishing the Rainy Day Fund as a fiscal buffer in the event of a major shock to the economy. If the additional €500 million committed to the Rainy Day Fund were to be spent this would, in the first instance, increase the general government deficit by another 0.2 per cent of GDP and have a corresponding impact on the structural position in each of the years 2019-2021.
Under the fiscal rules, an additional €900 million of expenditure is permitted. The impact of spending this €900 million is shown in Line ‘d’ in table 4 of the Summer Economic Statement. The following table is reproduced for the Deputy’s convenience:
|
-
|
2019
|
2020
|
2021
|
|
a. General Government Balance (SPU 2018)
|
-0.1
|
0.3
|
0.4
|
|
b. Structural Balance (SPU 2018)
|
-0.4
|
0.1
|
0.3
|
|
c. MTO
|
-0.5
|
-0.5
|
-0.5
|
|
Targeting minimum compliance with expenditure benchmark:
|
|
|
|
|
d. General Government Balance (minimum compliance)
|
-0.4
|
-0.4
|
0.2
|
|
e. Structural Balance (minimum compliance)
|
-0.7
|
-0.6
|
0.1
|
Note: The scenario above does not take into account the second round effects of any such measures
By spending the maximum amount permitted under the fiscal rules the structural deficit would increase and we would not achieve the MTO until 2021.
As I set out in the Summer Economic Statement, this represents money that we would have to borrow, further adding to our debt pile at a time of major downside risks to the economy. Budgetary policy will be formulated on the basis of what is right for the economy at this stage in the cycle and not by minimum adherence to the fiscal rules, which would allow inappropriate increases in expenditure.
