Mr. Seamus Coffey:

I thank Deputy Chambers for her questions.

We assessed the figures for budget 2017 in our November 2016 fiscal assessment report. She is correct to say that prior to that we had said it would be prudent to increase fiscal space to between €1 billion to €1.2 billion for the budget. Yes, the budget went beyond that. In November 2016 we said that expenditure went beyond what was prudent and was inappropriate for the economy both from a fiscal perspective, managing the public finances, and from an economic perspective.

In terms of public finances, one might say that the impacts are small. The breach of the expenditure benchmark was €200 million. The additional €200 million in a sense is baked in and occurs each year. If one gets repeated breaches of the fiscal rules - as we are getting - there will be a build-up of spending and maybe tax cuts above what would sustainably be allowed. It is not simply a case of small breaches. Once one adds them up one gets to a significant position. We have only been in this part of the fiscal framework for two years. It looks like we have breached the rules for 2016 and are set to breach them for 2017. If those patterns continue there is a potential that public finances will be in a more vulnerable position than they would have been if we had adhered to the fiscal framework.

The Deputy asked what impact Brexit will have on the fiscal framework. One impact of not adhering to it is that we would not be in as strong a fiscal position to deal with the impact of Brexit as we might otherwise be. She spoke about the benefits of Brexit. At the moment much of the focus is on how much Brexit will cost the Irish economy. If it does bring costs, we would like to be in a position to deal with them and absorb them. When one wants additional fiscal effort to deal with such problems then one wants to have it available. If we have already used the additional fiscal effort then it will not be available. Ireland has a history spanning 50 years of using fiscal resources when they were not needed and not having them available when they were needed. That is the cycle that we want to break. It is unclear whether we have moved far enough away from the old patterns to allow that to happen.

In terms of the benefits of Brexit, a hard Brexit has been built into the current macroeconomic forecasts. One could say there is an upside if Brexit does not turn out as hard as envisaged. Let us consider the growth forecast produced by the Department of Finance. It has already knocked half a percentage point off the GDP growth rates for most years out to 2021. Depending on the outcome of the negotiations, maybe Brexit will not be as hard as that.

It is not the Irish Fiscal Advisory Council's role to judge whether Brexit is beneficial. If the UK leaves the customs union and the Single Market there is potential for Ireland to benefit but it is very difficult to say what form that will take. There has been some focus on the financial world and whether financial companies would move. From an Irish perspective, I am sure we are interested in employment. It is unclear how Ireland could benefit from companies moving their head office or the licensing part of their operations. The key issue for us is the potential impact Brexit could have on trade out of Ireland. If there is a hard Brexit and trade barriers imposed then Ireland's potential growth rate would be lower. Irish companies must find different markets and are well used to dealing with the UK market. From a food perspective, both countries have similar tastes. We make products that we consume and they consume but it may not be as easy to enter other markets.

In terms of the breaches of the fiscal rules in the past number of years, the breach in 2016 was primarily in terms of the structural benchmark or deficit. In terms of the continued improvement we must make in our deficit, we brought it below 3% of GDP but it was still a deficit. There is a requirement to move to what is called a balanced budget in structural terms. A balanced budget is deemed to be -0.5% of GDP, to which we must make steady improvements. The requirement is to improve by 0.6% percentage points of GDP each year. There was a 0.3% improvement in GDP in the outturn for 20016. That means we were 0.3% short.

The expenditure benchmark is the other rule. Ireland, under the rules that applied at the time, did not breach the expenditure benchmark in 2016. That was primarily due to a technical adjustment that was not made. There was an AIB transaction in 2015 that allowed additional spending. We did not breach the expenditure benchmark.

It looks like both rules will be breached in 2017 and, thus, we would not have the required improvement in the structural balance. We are supposed to improve it by 0.6 percentage points of GDP. We are not getting there fast enough. Again, a breach of the expenditure benchmark has been planned for.

Reference was made to the principle that sets the amount of fiscal space or how much one can increase expenditure. Given what has been done in revenue, and we have had some revenue reducing measures that limits expenditure, yet we have increased expenditure above the expenditure benchmark, and it is planned to breach that in 2017. One could say that the breaches that took place in the two years were minor but they do start to accumulate.

The final topic that the Deputy raised was housing and overheating the property market. One of the problems that we see at the moment is that the housing supply is so low and, thus, problems are building up. It is pretty clear that housing output is below the equilibrium level. The longer that situation persists the greater the chance of pent-up or unmet demand. When housing output does begin to increase, not alone will we have the equilibrium level of output that we want to have to meet ongoing demand, we will have the legacy problem of five years of reduced output. Output could ramp-up pretty quickly, not necessarily from the public sector but, equally, from the private sector. The latter has the potential to increase much faster. There is a concern how that situation will impact on the economy. The employment rate has hit 6% and growth remains quite strong. The economy will probably grow by between 5% and 6%, which is above it long-run equilibrium growth rate. There is difficulty in measuring that but it is probably somewhere between 3% and 4%.

The economy is growing above that at present. If we were to ramp up housing output, and if it does ramp up, where are the workers going to come from if the unemployment rate is dropping? Are we going to lose workers from other sectors? Are people going to transfer to construction? Will this lead to wage pressures as there is competition for workers? Perhaps workers could be imported through net inward migration but they would require housing. We would be bringing in workers to solve a problem that they are adding to. The issue is whether there is the space in the economy, both the fiscal space to fund additional public spending on housing and the resource space is available. At present we see no overheating in the economy. The unemployment rate is low, but at 6% there is still some capacity in the labour market. We are not seeing a large increase in credit, which would be an issue in respect of an economy that could potentially be overheating. What we would like to get is a much clearer picture on our external position. Are we borrowing money from abroad? Are we living within our means? At present our external position is hugely influenced by the impact of the multinationals. It shows Ireland having a huge balance of payments surplus in that there is far more money coming into the Irish economy than leaving. If that is accruing to multinational companies, it is not necessarily giving us a true position of where the underlying position of the Irish economy is. The CSO has promised to give us an improved measure over the next couple of weeks. If we look at an indicator of where an economy is going, the current account, the flow of money in and out of a country is a very important indicator. We do not have that at present. Across the range of indicators we have looked at, we do not see overheating pressures but we see the potential to move in that direction.