Michael Noonan (Limerick City, Fine Gael)

I propose to take Questions Nos. 2 and 3 together.

As part of the corrective arm of the Stability and Growth Pact, once an excessive deficit has been identified, the focus of budgetary policy is on reducing the headline deficit to below 3% of GDP. Following agreement with the ECOFIN Council in December 2010, we are required to correct our excessive deficit by 2015, a timeframe that balances the need for consolidation as well as the need to support economic recovery. Under the European semester, member states are required to produce macroeconomic and fiscal forecasts for the current year and for the following three years. The Department does not have detailed macroeconomic and fiscal forecasts beyond 2015 as this is not the norm.

Once a member state corrects its excessive deficit, it is subject to the preventive arm of the Stability and Growth Pact, where the focus is on targeting a structural budgetary position that ensures fiscal sustainability over the medium and longer-term. This is the so-called medium-term budgetary objective, MTO, which for Ireland is currently a structural deficit of 0.5% of GDP. As is it part of the Stability and Growth Pact, we are required to target this MTO irrespective of the stability treaty. Post-2015, therefore, we will be required to make progress towards meeting our MTO. This will be done on a phased basis on the basis of a timeline to be agreed with the Commission.

However, as I have outlined before, the exact size of the structural component of the deficit in 2015 is highly uncertain and contingent on policy measures yet to be announced or to take effect. The range of estimates by different institutions is currently quite large and I would point out that, in the context of the stability treaty, participating member states are not bound by the EU harmonised methodology. For national purposes, a methodology adapted to Irish circumstances can be used. Moreover, not only do technical estimates differ depending on the approach used, but it is also the case that estimates of the structural balance further out on the forecast horizon are not fixed. Policies being implemented at present, together with future measures, can be expected to impact positively on the current point-in-time projections.

As I have said previously, reducing the structural element of the deficit will require policy action, though not necessarily taxation and expenditure adjustments. Other options are available and it is the Government's intention to pursue these. Such measures include labour market reforms, together with investment in technology and infrastructure. By boosting the productive capacity of the economy, the ambitious programme of micro-economic reforms that is already under way is expected to help reduce the structural element of the deficit by the middle part of the decade. For example, the Action Plan for Jobs 2012 and the Pathways to Work initiative include reforms aimed at addressing some of the skills mismatch in the labour market, which should help permanently lower the unemployment rate. This would have a structurally beneficial impact on the public finances, on both the revenue and expenditure sides. In summary, therefore, there are many moving parts and all of these make estimates of the budgetary impact of meeting our medium term objective subject to a high degree of uncertainty.

As part of the reforms to the Stability and Growth Pact contained in the so-called six pack of legislative reforms, member states with a debt-to-GDP ratio in excess of 60% will have to reduce the part of their debt ratio above the 60% threshold by one 20th annually. This will have to be done irrespective of the stability treaty, although it also forms part of the treaty.

Ireland and the other member states currently in excessive deficit on the basis of the deficit criterion are not subject to the debt correction rule at this time. In Ireland's case we must first stabilise our debt-to-GDP ratio. It is forecast that this will be achieved next year. After coming out of the current excessive deficit procedure and as a programme country we will be able to avail of a three year transition period before the full one 20th rule will apply. This means Ireland will not be fully bound by the one 20th rule until 2019, although in the 2016-18 period we will need to make sufficient progress in terms of reducing our debt ratio.

I reiterate the point that when it comes to meeting the debt requirement it is reasonable to expect that economic growth will do most of the heavy lifting. To suggest otherwise is misleading.

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