Pádraig Mac Lochlainn (Donegal North East, Sinn Fein)
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Question 45: To ask the Minister for Finance the methodology used by him in calculating the structural deficit; and whether that methodology is the same as that currently used by the European Commission. [19309/12]

Michael Noonan (Limerick City, Fine Gael)
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As part of the ongoing surveillance of fiscal policies within the EU, a harmonised approach to determining the structural balance has been developed between the Member States and the EU Commission. Using this harmonised methodology Member States are required to present point estimates of the structural balance for the forecast period in their Stability Programme Updates. It is on that basis that my Department has in the past published these technical figures, based on its assessment of the headline deficit and the macro-economic situation. The methodology is somewhat complicated, but in general terms involves decomposing the government balance into its cyclical and structural components. Under this approach, the cyclical component of the headline balance is generated from estimates of the economy's position in the cycle - the so-called output gap - together with estimates of the sensitivity of the public finances to the economic cycle. This cyclical component is then netted from the headline balance in order to arrive at the structural balance.

More details, including the econometric equations used to calculate the output gap, are available on the website of the European Commission's Directorate General for Economic and Financial Affairs.

Finally, it is worth stressing that there are health warnings to all estimates of the structural balance, especially for a small, open economy such as Ireland where large structural changes have occurred in recent years. It is also the case that under the harmonised approach, not sufficient recognition is given to the particular unique features of our economy. Some of the problems associated with the harmonised approach have been outlined by my Department in the various Stability Programme Updates that have been published in recent years.