Professor John McHale:

That is a very good question. To get the structural balance, an adjustment is made based on the output gap. If the economy is considered to have a positive output gap - to be overheating, to all intents and purposes - essentially, an amount would be added on to the deficit to get the structural deficit. Under this commonly agreed methodology, there is an output gap of almost 2% at the moment. It is increasing the structural deficit. If Ireland was above its target of 0.5% of GDP, it would have to bring the structural deficit down by 0.6 percentage points of GDP per annum anyway. We think the commonly agreed methodology overstates the size of the output gap. Based on our analysis, we are probably close to an output gap of zero, if not a slightly negative output gap. It is closing rapidly.

I will set out the implications of the mismeasurement, to the extent that there has been a mismeasurement. It will take us a further year to reach our medium-term objective than would otherwise be the case. If we had a zero output gap at the moment, we could take the general Government balance as being equal to the structural balance. The projection for next year is that the general Government balance will be 0.4% of GDP, which would be below the medium-term objective. The convergence margin would not apply in such circumstances. This means that the extra adjustment is going on for a year longer than would otherwise be the case. It would be better if this was not happening. In an ideal world, the output gap would be measured properly.