Dáil debates

Wednesday, 1 April 2015

Ceisteanna - Questions - Priority Questions

EU Budget Issues

10:00 am

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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5. To ask the Minister for Finance if he will provide an update on negotiations regarding the expenditure benchmark and the application of European Union budgetary rules with his European Union colleagues; the aims of these discussions; and when he expects an outcome. [13307/15]

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Baineann an cheist seo leis na díospóireachtaí atá ar siúl sa Bhruiséil ó thaobh na expenditure benchmark rules. The Fiscal Advisory Council's report on the rules issued this morning, which will be a helpful addition in terms of the Minister's negotiations with his European partners. Could he outline to the House the status of the talks and the impact on the budget if the expenditure benchmark rule is changed, as this country has requested? What leeway would it give on expenditure?

Photo of Michael NoonanMichael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
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From 2016, the public finances in Ireland will be subject to the rules of the preventive arm of the Stability and Growth Pact. Assessment of compliance with the rules of the preventive arm is based on two pillars, the annual improvement in the structural balance and the expenditure benchmark. The expenditure benchmark links growth in expenditure to the potential growth rate of the economy. Additional expenditure above the benchmark has to be paid for through the introduction of new discretionary revenue measures. The benchmark also contains a feature that is designed to assist with achieving the minimum annual structural improvement of more than 0.5% of GDP.

I have raised on a number of occasions, including at the recent Eurogroup meeting, the use of outdated estimates of growth in the calculation of the expenditure benchmark. At the moment, the reference rate used in the calculation of the expenditure benchmark is based on a ten-year average of potential growth that is updated every three years. The reference rate to apply for 2014 to 2016 was calculated in 2013 when both the outturn and outlook for our economy's growth potential was considerably weaker. The use of such outdated estimates could lead to inappropriate fiscal decisions being made.

On foot of my interventions at political level, my officials have been in discussions at a technical level with the European Commission and other member states. The aim of technical discussions has been to ensure that the methodology for calculating potential output and its implementation in the context of EU fiscal rules is applied in a manner that produces credible results that underpin the operation of a sound set of rules. The focus of our discussions has been two pronged; first, to improve how estimates of potential GDP are calculated for Ireland by using more appropriate population projections and, second, to apply the calculations in a more logical fashion so that the fiscal policy consistent with the rules is set based on latest available information regarding both the outturn and prospects for the Irish economy.

Discussions are progressing well but final decisions at a technical level must be endorsed at the relevant committees. While I do not want to prejudice the ongoing discussions, I welcome the strong engagement of the Commission on this issue. Finally, I emphasise that I support the revised fiscal rules. What I seek from the Commission and colleagues from other European states is a more sensible application of the rules for all member states as this will enhance the credibility of fiscal policy decision making.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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If it were not so serious one would laugh. The Minister was one of the architects of the rules and the first time they apply to this country is now, and we are over with the begging bowl asking to get rid of some rules that are simply not sensible. I agree with the Irish Fiscal Advisory Council's report that there is an anomaly in the rules and they need to be changed. It is not only the rules that must be considered as other issues must be taken into account such as the calculation of structural deficits and structural surpluses that will cause problems in the future. There is suspicion that this is happening as a result of it being an election year, that the Government has implemented all of the austerity rules and policies but given the impending election and the fact that it has committed to reducing the income tax rate for top earners, under the current rules the expenditure benchmark would not allow that to happen, and that the measure is very much geared towards election commitments.

The Minister said the matter must be agreed by committees in Europe. Is it expected that we will have a decision before the April statement?

If it is not expected, does the Minister expect to base the April statement on what he is seeking from Europe, which is the revised expenditure benchmark rate?

10:10 am

Photo of Michael NoonanMichael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
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I want to make it clear that I and the Government believe in the rules that stem from the Stability and Growth Pact. The issue is that when rules are applied to give bizarre or peculiar results, the application of the rules needs to be examined. For example, technical people in the European Commission looking at migration patterns from 2008 for three years or so, when migration was very strong, came to the conclusion that the Irish population would decline by a million by 2030 and built expenditure loans around that. That is nonsense; it is not going to happen and it is quite clear that population trends now negate that. Some kind of theoretical, bizarre interpretation of economic data cannot be the base for applying the rules. The second issue is that as a general expenditure rule, sovereigns should keep their increase in expenditure below their net growth rates. That gave another bizarre result for us because of the averaging over ten years. There is an argument that for 2016 we must keep our expenditure increase below 0.6% on the basis that the growth average is 0.6%. Quite obviously that is not the current growth rate, and I welcome the paper produced by the Fiscal Council, which casts independent light on this issue. It has moved the expenditure benchmark up to 1.8%, which gives a certain amount of room.

On the last question the Deputy asked, I would hope to see further clarification of this in the spring statement.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I welcome the fact that it will be there before the spring statement. The expenditure benchmark is something I have been raising with the Minister and his Department for a long time now. The Minister's legacy when it comes to how he deals with some of the economic data is that it is about keeping the Opposition in the dark. We have been raising this for the guts of a year and finally, at the foot of an April statement, the Government is starting to deal with the issue.

The Minister presented me with figures last year whereby the expenditure benchmark would currently allow him a leeway of about €400 million in additional expenditure. Obviously, if he reduces taxes as he has planned, the €400 million would be absorbed and there would be no expenditure increases. This morning on "Morning Ireland" the Fiscal Council suggested that the rules, if granted, would allow him about €700 million of leeway, which could be further enhanced with drops in unemployment. Does he concur with that statement?

The council has also very strongly cautioned against decreases in income tax as a result of increased pressures on health, education and pensions. Can the Minister give us any indication of whether he is going to adhere to the Fiscal Council's strong suggestion that discretionary income tax reductions should be avoided and instead focus on those areas where is there growing pressure?

Photo of Michael NoonanMichael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
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I always listen to the advice of the Irish Fiscal Advisory Council, which is independent and gives its advice freely without any influence of the Government being brought to bear on it. We will follow the same approach on this occasion. It is a long way to the budget but we will be laying out the parameters of where I think the economy is going to go in the spring statement.

The Deputy has indeed brought up the expenditure benchmark on a number of occasions, but we have given him as much information as we have on all occasions. I would think that in comparison with the situation under other Administrations, the flow of necessary financial data to individual Deputies and to the finance committee is very strong. We have been quite transparent on these issues and can arrange for further briefing if that is necessary.