Pearse Doherty (Donegal South West, Sinn Fein)
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Question 143: To ask the Minister for Finance the methodology used by him to calculate the State's structural deficit; and if he will make a statement on the matter. [9455/12]

Michael Noonan (Limerick City, Fine Gael)
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The structural deficit refers to the general government deficit adjusted for the economic cycle and one-off / temporary measures. Unlike the headline deficit, the structural deficit cannot be measured directly and must be estimated. This is difficult to do with any degree of accuracy, especially in a small open economy such as Ireland's, as acknowledged by the Fiscal Council in its recent report. As such, all estimates of the structural deficit are surrounded by considerable uncertainty. Budget 2012 provided estimates of the structural deficit for the period 2011-15. The starting point was identifying the cyclical position of the economy, which was estimated on the basis of the harmonised production function methodology developed jointly by the European Commission and Member States (further details can be found in European Economy, Economic Paper 420, July 2010, available on DG ECFIN's website). The idea is to estimate the difference between aggregate demand and aggregate supply. The latter - potential output - is determined on the basis of available quantities of capital and labour, along with estimates of trend total factor productivity (TFP). The difference between aggregate demand and supply, which is known as the output gap, establishes the cyclical position of the economy. The elasticity of the budget balance with respect to the economic cycle is estimated to be 0.4 in Ireland's case.

By adjusting the headline deficit projections set out in Budget 2012 for this cyclical component and for one-off measures, an estimate of the structural deficit for each of the years 2011 to 2015 was arrived at. Like all estimates, these will be updated periodically as we go forward. In terms of any assessment post 2015, while the same methodology would apply it must also be noted that even greater uncertainty would surround any such forecast.