Table 9 of the Economic and Fiscal Outlook sets out the impact of the various taxation and expenditure measures introduced in Budget 2019 on next year’s fiscal position. These have a positive short-run impact upon aggregate demand, which in turn generates taxation revenue. The additional tax revenues or ‘buoyancy’ arising from these second-round effects is estimated to be of the order of €295 million next year. This represents buoyancy of approximately 26 per cent on the full net budget package, which is within the usual range.
In terms of its calculation, this represents the difference between the extra taxes projected for 2019 on a no-policy change basis i.e. the White Paper scenario and the forecast tax take following the introduction of Budget 2019, less the net change in tax yields arising from the introduction of the new measures. Therefore in summary, this represents the additional projected net tax yield arising from the implementation of Budget 2019.
It should be noted, buoyancy is not used in the calculation of fiscal space as this is an expenditure-driven concept. Under the expenditure benchmark, the fiscal rules take account of discretionary revenue measures, such as an increase in tax rates or other structural revenue-raising measures. Increases in revenue due to buoyancy from the economic cycle should not be used in the calculation of fiscal space.
At present, the fiscal rules - both the structural balance rule and, especially, the expenditure benchmark rule - are not well-suited to guide budgetary policy, given our position in the economic cycle. I highlighted this in the Summer Economic Statement and I note that the Irish Fiscal Advisory Council, in its pre-Budget statement, also addressed this issue.
Accordingly, the more important framework for guiding fiscal policy is 'fiscal stance' - what is right for the economy at a particular point in time, so as to support sustainable, incremental improvements in public services and living standards. Given the range of potential challenges facing the economy, it is only possible to assess the appropriate fiscal stance on a year-to-year basis at present.