Wednesday, 1 February 2012
Public Finance Strategy
Question 1: To ask the Minister for Finance his views on the impact of the new proposed European Fiscal Compact Treaty on Ireland's public finance strategy beyond the end of the Programme for Assistance with the EU and IMF in 2013; the period of time over which he expects Ireland will have to reduce its structural deficit to 0.5% of GDP and its debt to GDP ratio to 60%; The impact this is likely to have on national budgets post 2013; and if he will make a statement on the matter. [5990/12]
The Government's overriding fiscal objectives are twofold: first, we must return to a situation in which we are living within our means; and, second, we must put the debt-GDP ratio on a firm downward path. The strategy to achieve these objectives is set out in the Government's medium-term fiscal statement as well as in the documentation accompanying budget 2012. These documents spell out the necessary consolidation to correct our excessive deficit by 2015 - in other words to reduce the general Government deficit to below 3% of GDP by that stage. On the basis of these measures, it is envisaged that the debt-GDP ratio will peak in 2013, and will decline thereafter.
This multiannual approach balances the need to support the emerging economic recovery with the need to pursue further consolidation. Crucially, this strategy has been agreed with the troika. The intergovernmental treaty on stability, co-ordination and governance in the economic and monetary union agreed on Monday does not change the strategy as implementing the programme commitments remains the priority.
Nevertheless, over the medium term, member countries are required to achieve a balanced budget in structural terms, in other words after adjustment for the impact of the economic cycle on the budgetary position. The timeframe for convergence towards the structural deficit target set in the intergovernmental treaty and our associated country-specific medium-term objective, MTO, is yet to be determined. At this point in time, it would be speculative to put forward a possible timeline for reaching the structural deficit of 0.5% of GDP and in any event it is currently the priority for Government to bring our actual deficit below 3% of GDP by the end of 2015. My officials will continue to work with the Commission on all aspects, including measurement of the structural fiscal position.
The debt correction requirement in the new treaty, which will apply to Ireland as our general Government debt-GDP ratio is above 60% of GDP, is the same as is already required under the reforms of the Stability and Growth Pact as part of the so-called "six pack" of legislative reforms.
Additional information not given on the floor of the House.
Specifically, we will be required to reduce our debt-GDP ratio annually by at least one 20th of the difference between the actual rate and the threshold rate. I would point out that a transition period will apply for all countries that are currently subject to the excessive deficit procedure on the basis of the deficit criterion, including Ireland.
In terms of the fiscal implications of this debt correction rule, it is important to remember that it is the ratio of debt-GDP that is important. In other words, on the basis of reasonable assumptions over the medium term, we can expect economic growth to do much of the heavy lifting. Furthermore, I think its also worth pointing out that, irrespective of our international commitments, we need to get the debt-GDP ratio down to more manageable levels because otherwise we will just spend more of our tax revenue on servicing the debt burden, which reduces the amount we can spend on education, health, social welfare and other areas.
It is also appropriate for me to highlight developments in recent times in our bond spreads and the NTMA's recent success in switching approximately €3.5 billion worth of bonds due to mature in 2014 with bonds maturing in 2015 at a broadly similar annual interest rate. This will smooth the maturity profile of Irish debt, and is a reflection of the improved market sentiment for Irish Government paper.
I thank the Minister for his response. In assessing the provisions of the fiscal compact, this is a key question that needs to be answered. The economic and fiscal outlook document the Minister published along with the budget in December clearly sets out that nominal GDP for Ireland is forecast to be €179 billion in 2015. The Department of Finance estimates that the structural deficit for Ireland at that time will be 3.7% of GDP or €6.6 billion in nominal cash terms. This is based on everything going according to plan between now and 2015 in terms of the growth rates and the fiscal consolidation between now and then.
As the Minister knows, under the treaty we are obliged to reduce the deficit on the structural side to 0.5% of GDP, so under static conditions it must be reduced to approximately €900 million, a reduction of €5.7 billion. Of course, conditions will not be static and it will be a combination of growth and the fiscal adjustment. The key question is as follows. Over what timeframe will Ireland be expected to deliver on that reduction of the structural deficit from 3.7% in 2015 to 0.5%?
Allowance is being made for countries with excessive deficits, especially countries in programmes, such as Ireland. The timeline will be a matter for negotiation with the Commission. Certainly countries with larger deficits will have a longer period of adjustment than countries with balanced budgets at present.
The Minister mentioned the word "negotiation" and I hope that will form part of the outcome because the wording of the treaty indicates that the timeframe will be proposed by the Commission. To what extent will the input of the individual member state be taken on board? By any measure a further adjustment of almost €6 billion in nominal terms, although we hope that growth will offset that, is very significant. It comes on top of €8.6 billion between 2013 and 2015. My question is very reasonable. In what timeframe will we be expected to deliver? What can stop the European Commission in 2015 requiring Ireland to knock a further €5 billion to €6 billion off our deficit to bring it within the 0.5%?
The practice of the Commission over the years with all governments is to discuss matters before imposing any regime. When it states "propose", it will discuss.
The Deputy is correct that the concept of a structural deficit is difficult to understand in the first place. It is extremely difficult to measure, particularly for a country such as Ireland, which has, in effect, a common labour market with the UK. The Deputy will remember the Warren Buffet quotation that it is only when the tide goes out that one discovers who has been swimming naked. The Deputy should reflect on that experience of his party's Government. The Fianna Fáil and the Green Party Government was supposed to be running surpluses for several years but was actually running structural deficits when all the headline figures suggested surpluses. The tide went out and they were left naked with the waves lapping around their ankles and nowhere to go.
The reason was that all the transactional taxes coming from the property industry were part of the cycle and were not a permanent feature of the tax system. That all disappeared and they left this huge deficit. When considered in those terms, structural deficits and structural surpluses are easier to understand.