Oireachtas Joint and Select Committees

Wednesday, 4 December 2019

Committee on Budgetary Oversight

Fiscal Assessment Report: Irish Fiscal Advisory Council

Mr. Sebastian Barnes:

I thank the Deputy for his question about compliance with the fiscal rules, which is something that rarely happens. The fiscal rules are important in providing an anchor for fiscal policy. In recent years they have provided some helpful signals on both when policy was too loose or when it was on the right track. When we move towards a principles-based approach, we did think very carefully and precisely about the Deputy's question whether it was complicated enough and why then we needed another framework.

We had two serious concerns about the European approach and how useful it was for us, at least for us as a fiscal council. The first was the complexity of the European rules, which take the form not only of quite a complicated system laid out in various laws, regulations and treaties but also of a 126 page book provided by the European Commission, called Vade Mecum, which is immensely complicated. We found we were spending a huge amount of time just trying to understand very arcane rules, often in footnotes, that were very hard to rationalise or to explain. We also had a more substantive concern that because of the way the Commission measures the economic cycle, there is a big risk that the European rules are procyclical. In the good times they say to spend more when states should spend less, and in bad times they come back and bite states and say that they should be cutting spending at a time when states should not do that.

Because of this procyclicality, and because in the intervening time the Council and the Department of Finance have provided our own estimates of potential output and the output gap that we think are fairly solid - while it is uncertain, we think they present a reasonable representation of where we are - we thought it was important to reflect that in the fiscal rules. That is why we decided that for our own assessment and the domestic Irish framework, a principles-based approach that was simpler and reduced the risk of procyclicality was a cost worth paying, even if it was a little more complicated. We hope that people will find it a useful tool to think about policy.