Dr. Robert Sweeney:

The current make-up of the fiscal rules has a number of pillars. Two of them are based on the structural deficit and we have an expenditure benchmark rule as well. The recent reforms proposed to move away and very much relegate the structural deficit rule. We will focus on the expenditure benchmark, specifically for countries that are in breach of the 60% and 3% deficit rules. The expenditure benchmark states that expenditure should not grow faster than the growth rate of potential output of the economy. Forecasting the potential output of the economy is very difficult. While it is slightly less problematic than, for example, forecasting and measuring structural deficits, it is not without its problems. How do we know, first, what potential output is? There is much controversy surrounding how potential output would be measured. Then, there is also the problem of trying to forecast this already controversial measure into the future.

What is implied by having net expenditure grow at the same rate as potential output is that unless you increase taxation, you have to keep government spending to GDP - or, in Ireland's case, GNI* - constant . Even if a country by any kind of reasonable standard would be well capable of engaging in deficit spending because interest rates are low, it would be prevented from doing so if it is in breach of the 60% threshold. For example, a country that has a little bit over 60% and has a low burden of servicing that debt could easily engage in deficit spending. It would be prevented from engaging in moderate deficit spending because expenditure can only grow at the rate of potential output, essentially. That is an implication of it. Another implication is that it will be difficult to actually engage in a lot of needed public investment because it is generally politically easier, assuming a benign financial environment, to fund public investment via borrowing than it is via tax increases.