Tuesday, 21 February 2012
Department of Finance
Micheál Martin (Leader of the Opposition; Cork South Central, Fianna Fail)
Question 199: To ask the Minister for Finance the reason the EU treaty will not lead to further austerity given the capping of annual structural deficits at 0.5% of GDP when the present EU rules limit annual deficits at 3% of GDP and that the Minister’s estimation is 3.7% by 2015; and if he will make a statement on the matter. [7780/12]
Michael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
The Stability and Growth Pact consists of two regulations (two “arms”), a corrective arm and a preventive arm, both of which have been recently amended as part of the ‘six pack’ of legislative reforms. Ireland is currently subject to the corrective arm of the Pact – we are required to correct our excessive (i.e. greater than 3 per cent of GDP) headline deficit by end-2015. The fiscal component of Ireland’s joint EU/IMF programme of financial assistance is built upon correcting the public finances. Putting the public finances on a more sustainable footing involves, in the first instance, a correction of our excessive deficit. In this regard, the decision of the Ecofin Council requires that Ireland correct its excessive deficit by end-2015, and a consolidation path towards correction (involving annual targets for the deficit) has been agreed. Therefore, it is our existing fiscal consolidation adjustment path that is valid until 2015. During the negotiation of the fiscal compact Ireland sought and received assurances that none of the provisions of the Fiscal Compact are to be interpreted as altering in any way the economic policy conditions under which financial assistance has been granted to Ireland in the Stabilisation Programme involving the European Union, its Member States and the International Monetary Fund. This is now clarified in the Preamble.
Once the excessive deficit is corrected, Ireland will be subject to the preventive arm of the Pact. So from 2016 onwards, we will be required to meet, or be making sufficient progress towards our medium term (budgetary) objective – the so-called MTO. In terms of the speed of consolidation towards the MTO, it is expected that the Commission will provide clarity on the time-frame for convergence, taking into consideration country-specific sustainability risks, that participating Member States will be required to respect. The MTO is set in structural terms, but as has been outlined before, there are considerable uncertainties surrounding estimates of this in Ireland. Leaving aside the methodological considerations, it should be remembered that estimates of the structural balance in 2015 are not fixed – policies that may be implemented by Government in the intervening period can be expected to have a bearing on the figure.
For instance, micro-economic reforms that help to address some of the skills mismatch in the labour market could help lower the “equilibrium” unemployment rate with a structurally beneficial impact on the public finances (on both the revenue and expenditure sides) – in other words, the structural fiscal position could improve with reforms. In this context, the Government’s recently announced action plan for jobs, which is designed to significantly improve employment over the next number of years, will alter the outlook for the labour market. This will impact positively on the amount of fiscal adjustment that may be required.
So, in summary, there are lots of moving parts and so the speed and scale of additional consolidation post-2015 must be seen in this context. However, what is clear is that in order to continue to restore sustainability to our public finances, Ireland’s budgetary position will – for the foreseeable future – have to be in balance or in surplus in structural terms.