Dr. Tom McDonnell:

The structural deficit is probably the hardest thing for macroeconomists to calculate. Essentially, to even begin to calculate it, one has to come to a judgment on the extent to which the economy is overheating. One also has to calculate what the output gap is and whether it is positive or negative. The Commission's methodology is pro-cyclical. The reason for that is because it overly emphasises recent unemployment rates. The Commission had an equilibrium unemployment rate of over 10% quite recently, which I would argue was a figure that even the Commission itself knew was wrong. What is the equilibrium unemployment rate? There is no answer to that because it is policy dependent. Since the Second World War, we have had unemployment rates as low as 3.5% or 4% in some advanced economies. In other countries, it has been much higher and in double figures. It is currently at about 5% in the US and the UK. If Ireland is able to get down to those levels, then we are clearly underheating at the moment. Again, that has implications for the available fiscal space. Our point is that we disagree that the economy is overheating and, therefore, the fiscal space figure for 2018 is overly conservative. I believe a nonsense will be made of all of the structural deficit calculations in five years' time. Looking back, one will be able to recalibrate what the fiscal space ought to have been and they will be very different numbers.