Brian Hayes (Dublin South West, Fine Gael)

The council's figure is more than €4 billion. The second part of the Bill will introduce fiscal rules, which Senator Barrett has set out in his Bill, and give legal backing to binding, multi-annual expenditure ceilings. These are important provisions.

As Senator Barrett knows, the Department of Finance and other Government agencies have done a considerable amount of work on this matter. The Department published a discussion document in March, a successful conference was held this year and the heads of the Bill are being drafted. The discussion document is available on the Department's website and sets out the main heads of the Bill and proposals. On 30 May, the Department of Finance and the Department of Public Expenditure and Reform jointly hosted a well-attended open seminar based on the discussion document.

Separate to the EU-IMF programme, there have been ongoing developments in the area of fiscal governance in the EU, as we are all aware. The initial round of developments culminated in the adoption of the so-called six pack to improve the functioning and effectiveness of the Stability and Growth Pact. The five regulations and one directive that were finalised in November and came into force yesterday have been taken into account in the continuing work on the heads of Bill. For example, key elements of the EU directive on budgetary frameworks are going to be transposed into Irish law in the Government's Bill. These include providing for the establishment of a medium-term budgetary framework, introducing country-specific numerical fiscal rules and requiring annual budgets to be prepared in accordance with medium-term budgetary frameworks. The regulations are already the law of the land and do not need to be transposed into Irish law, but it is critical that the provisions of the fiscal responsibility Bill are fully consistent with them.

As Senators are well aware, the European situation has continued to change rapidly in response to the ongoing euro crisis. The most recent developments came at the European Council meeting last week where euro area Heads of State and Government plus those of most other EU member states committed to establishing a new fiscal rule with a number of elements. Senator Barrett's Bill predates last weekend's summit. While the heads of the agreement were struck last weekend, the legislation's specific proposals will not be worked through until February or March. Much can change between now and March when I hope the agreement will come into place.

Last week's commitment must be turned into an intergovernmental agreement that will be ready for signature in March. The question of whether a referendum is required on the agreement will be decided when it is concluded. The provisions of the agreement would need to be given effect in Irish law through legislation. Given the work already under way, this will probably be through the fiscal responsibility Bill. I am sure that Senator Barrett appreciates that much can change before March, in which case it would be wrong to reach a decision on the matter this evening.

The Bill will provide for the introduction of fiscal rules. The current proposals are largely as set out in the Department of Finance discussion document. Three fiscal rules were proposed to apply in different situations. However, the commitment by the euro area Heads of States and Government has introduced new elements that will need to be taken into account in the legislation, particularly in the design of the fiscal rules that will apply to the preparation of the Irish medium-term budgetary framework and to our annual Estimates.

For instance, the impact of the requirement that general Government budgets shall be in balance or surplus, which will be deemed to be respected if the annual structural deficit, as a rule, does not exceed 0.5% of nominal GDP, will have to be taken into account in the fiscal rules in the Bill. The issue of structural deficits is a complex one and the explanation given by Senator Barrett about them in the explanatory memorandum of his Bill is very useful and timely. Senator Barrett is correct in his view that the focus should be on structural deficits because, as he points out, a cyclical deficit brought about by recessions or below-potential GDP output can be accommodated. In other words, nominal deficits are possible under a balanced budget rule in structural terms because the automatic stabilisers, such as higher unemployment-related expenditure, are taken into account in estimating the underlying structural deficit. Senator Barrett made that point in giving flexibility in the Bill to apply that rule.

However, the estimation of structural budget deficits is complex and difficult for small, open economies such as Ireland because of limitations with the method. For instance, how does one estimate the potential increase in the labour force in an economy that has a common labour market with the UK? Another problem is the huge structural change the economy is going through at present. What is the structural rate of unemployment when the construction sector is downsizing rapidly? There are many limitations in any exercise that tries to estimate the cyclical position of the economy. These technical, but non-trivial, issues will have to be tackled in the negotiations on the inter-governmental agreement in the first instance and then catered for in whatever fiscal responsibility Bill goes through these Houses.

The fiscal rule proposed in the discussion document last March is that the public finances correction rule, or the stormy weather rule, would apply when the general Government deficit is greater than 3% of GDP. The second area was the prudent budget rule or bad weather rule, which would apply when the Government deficit is under the reference value of 3% of GDP and general Government debt is under 60% of GDP but the general Government deficit is still above the medium-term budgetary objective. The third area was the sustainable expenditure rule or the good weather rule. Further thought has already being given to whether the coverage of the proposed expenditure rule should be expanded to include capital expenditure and to how cyclical expenditure should be treated. It is not proposed to include non-voted expenditure in the expenditure covered by the rule. This type of expenditure consists primarily of our debt servicing costs and treaty obligations, such as our annual contribution to the EU budget. It is also likely that the rule will be modified to take account of discretionary tax measures in both directions. If discretionary tax measures increase the projected level of tax revenues, the growth in expenditure may take it into account but the converse would also apply, that is, if tax cuts were leading to lower tax revenues they would have to be taken out of the permitted increase in expenditure.

The discussion document also provided for exception provisions under which the application of the rules could be set aside. Escape clauses in the case of a national emergency or a severe macro-economic imbalance are a common feature of fiscal frameworks. Senator Barrett made that point in introducing the Bill.

I refer to the multi-annual expenditure ceilings. In the comprehensive expenditure report 2012-14 published last week by the Minister for Public Expenditure and Reform, a completely new and reformed system of managing public expenditure was set out in some detail. The new expenditure framework is anchored in a clear, sustainable medium-term plan, setting out the total quantum of public expenditure broken down by current and capital categories and based on the resources that are available. The Government's medium-term fiscal statement of 4 November represents a first decisive step in this regard.

Within the overall spending limits, multi-annual expenditure ceilings have been set out for each Department for each of the next three years. The old, annual Estimates campaign, conducted privately within the system of public administration, is now being replaced by a modern, multi-annual framework that will allow for full transparency about allocations. Crucial to the success of that process, in teasing out expenditure items with Ministers, is a fundamental engagement with committees on the expenditure profiles of each Department. There will be a proper stress-testing of that expenditure, whether it is achieving its objectives and whether it represents value for money and will make a difference. I contrast this with the old-fashioned notion of plus or minus last year's allocation. That is no way to run a modern economy and one of the reasons we are in this dreadful mess is that old-fashioned view of expenditure profiling across public administration. The Minister for Public Expenditure and Reform announced a fundamental reform of how we analyse expenditure profiles here. This requires proper engagement of committees of the Houses to ensure we get value for money.

As required under the EU-IMF programme, the fiscal responsibility Bill will also establish the Irish Fiscal Advisory Council on a statutory basis. The council, which commenced operations in July 2011 on an administrative basis, has the following functions. It assesses the soundness of the economic and budgetary projections and forecasts underpinning the stability programme and the budget, whether the Government is complying with the fiscal rules, and the appropriateness of the fiscal stance adopted by the Government in the stability programme and the budget. The council will be fully independent of the fiscal authorities in the performance of its functions and will be required to publish its assessments. The Bill will not include any sunset clause for the Irish Fiscal Advisory Council. This body is, and will continue to be, a key and permanent player in the reform of our fiscal and budgetary system. Shortly after our election to Government, we set up the council on an administrative basis so that it can be put on a statutory basis when the Bill is through the Houses.

I thank Senator Barrett for his constructive suggestion in this Bill. I am not a Member of this House, I have no vote and no standing here. Bunreacht na hÉireann does not refer to the Government in this House. It is a matter for the 60 Members of this House to determine their views on Senator Barrett's Bill. Sometimes people look to the Government for advice and that is always a dangerous thing. If this debate were to continue in parallel between the clear objectives and constructive proposals in Senator Barrett's Bill and the legislation we will publish by the end of the first quarter of next year, it could be a constructive position to take.