Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I am pleased to have the opportunity of introducing the Second Stage reading by the Seanad of the Fiscal Responsibility Bill 2012. I thank Members of the Seanad for agreeing to discuss it today.

With regard to the topic of fiscal responsibility, the Seanad has a head start over the Dáil because of the Fiscal Responsibility (Statement) Bill 2011 which was introduced by Senator Barrett. Prior to the Second Stage debate on that Bill, Senator Barrett held a number of sessions on the Bill and the topic in general. The Bill before the House today is explicitly drafted to meet the specifications of the treaty in making provision for its implementation in national law. This is why it has not been possible to incorporate Senator Barrett's proposals, but I congratulate him on the work he has done in this area.

As Senators will be aware, on 31 May 2012 the people voted in a referendum to ratify the stability treaty or, to give it its full title, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. The aim of the stability treaty is to improve the stability of the euro and provide for better co-ordination between the participating countries and agreement on shared ways of managing our economies.

To fully inform the electorate of the context of the referendum, I published the general scheme of the Fiscal Responsibility Bill 2012 on 26 April 2012. That general scheme set out the draft legislation that would implement key provisions of the stability treaty, subject to the will of the people. The key purpose of this legislation is to implement the fiscal rules in the stability treaty. These rules are sensible and prudent and represent a responsible approach to budgeting.

As per our programme for Government commitment, the Irish Fiscal Advisory Council was established on a non-statutory basis in July 2011. It was tasked with assessing the official macroeconomic and budgetary forecasts and the fiscal stance. Now, as part of the Fiscal Responsibility Bill 2012, the fiscal council will be put on a statutory basis and assigned additional responsibility for monitoring and assessing compliance with the fiscal rules we have signed up to under the stability treaty.

The Fiscal Responsibility Bill is part of an overall move towards more secure and stable economic governance throughout Europe. Many steps have also been taken Europe-wide to address the problems caused by the acute economic crisis, to encourage recovery and to ensure the mistakes of the past cannot be repeated. The stability treaty is an important part of this effort and the people agreed.

The EU has fundamentally strengthened the economic rules that apply, particularly in the euro area. This was achieved through reforms, including in the six pack, which consists of five regulations and one directive covering fiscal surveillance and macroeconomic surveillance. The reforms amended and strengthened the Stability and Growth Pact, reinforcing the corrective elements of it.

Other major steps were taken to strengthen the euro area economy. Rescue mechanisms were put in place to ensure member states, such as Ireland, experiencing difficulties could access loans when they could not raise money from the markets at a sustainable cost. The EU has worked to stabilise Europe's banks and has refocused its efforts to ensure economic growth and job creation are its top priorities. Ireland has participated and co-operated fully in this regard.

These aims were clear in the stability treaty. According to its first article, its aim is to "support the achievement of the European Union's objectives for sustainable growth, employment, competitiveness and social cohesion". It contributes to these objectives through budgetary rules, intended to ensure good housekeeping in each country, and by arranging for countries using the euro to work closely together and support each other.

The stability treaty will enter into force on 1 January 2013, provided that 12 euro area member states have deposited their instruments of ratification, or on the first day of the month following the deposit of the 12th instrument of ratification by euro area member states, whichever is the earlier. At present, eight euro area member states and four other European member states have ratified the stability treaty. Ireland will deposit its instrument of ratification as soon as the Fiscal Responsibility Bill 2012 has been enacted.

In other measures aimed at improving expenditure control, the Ministers and Secretaries (Amendment) Bill 2012 was published at the end of September. The purpose of this is to provide a statutory basis for multi-annual Government expenditure ceilings and multi-annual ministerial expenditure ceilings that have been introduced on an administrative basis. It amends section 17 of the Ministers and Secretaries (Amendment) Act 2011 and provides for the Government, following a proposal from the Minister for Finance, to approve an upper limit on Government expenditure, which carries the aggregate amount of voted expenditure and the expenditure of the Social Insurance Fund and the national training fund, for each of the following three financial years.

It also provides that the Government shall, following a proposal from the Minister for Public Expenditure and Reform, approve the amount of Government expenditure to be apportioned into ministerial expenditure ceilings for each of the three financial years concerned.

The Bill before Senators closely follows the stability treaty, as accepted by the people. A key change from the general scheme involves providing for a correction mechanism to be triggered automatically in the event of significant observed deviations from the medium-term objective or the adjustment path towards it. The correction mechanism, which concerns the nature, size and timeframe of the corrective action to be undertaken, could not be included in the general scheme because the common principles required under the stability treaty were not yet available. However, the European Commission subsequently adopted them in June. In addition to the correction mechanism, the common principles also covered the role and independence of the institutions responsible at national level for monitoring the observance of the rules and these elements have been reflected in the Bill.

The key elements of the Bill are the introduction of a budgetary rule, the introduction of a debt rule, the requirement to implement a correction mechanism if there is a significant deviation from the budgetary rule, and placing the Fiscal Advisory Council on a statutory basis, ensuring its independence and ability to complete the relevant competencies.

I will now set out full information on the Bill, section by section. The purpose of the Bill is to provide for the implementation of Articles 3 and 4 of the stability treaty, including the establishment of the Irish Fiscal Advisory Council on a statutory basis, as it will be the independent body responsible at national level for monitoring compliance with the fiscal rules. We have been advised by the Office of the Attorney General that Articles 3 and 4 of the stability treaty require implementation by way of national legislation, while the remaining articles of the stability treaty are binding obligations at international law that do not require to be reflected in national law.

Section 1 is the interpretation section. Section 2 requires the Government to endeavour to comply with the fiscal rules, which are set out in the subsequent sections. This section also provides that the official macroeconomic and budgetary forecasts prepared by the Department of Finance include all the data needed to assess if the Government is complying with the fiscal rules.

Section 3 outlines the budgetary rule required by Article 3 of the stability treaty. One of two conditions must be satisfied. These conditions are that the budgetary position of general Government is in balance or in surplus, and this will be deemed to be the case if the medium-term budgetary objective set under the Stability and Growth Pact is achieved, or, if it is not, that it is on the adjustment path towards adhering to our medium-term budgetary objective.

In line with the stability treaty, section 3 allows for neither condition to be met in the event of exceptional circumstances. The definition of exceptional circumstances as per the stability treaty means an unusual event outside the control of the State which has a major impact on the financial position of the general Government or a period of severe economic downturn, provided that the temporary deviation of the State does not endanger fiscal sustainability in the medium term.

Senators should be aware that the medium-term budgetary objective set under the Stability and Growth Pact is expressed in structural terms. This means the deficit target excludes one-off and temporary measures, and is cyclically adjusted.

Section 4 deals with the debt rule specified in Article 4 of the stability treaty. The requirements of the debt rule are already law under EU Regulation 1467/97, which was amended by the EU six pack of reforms. However, as it is specifically included in the stability treaty, we are providing for its implementation in domestic law through this Bill. The text accomplishes this by direct reference to the relevant EU regulation. This eliminates the possibility of drafting a provision that could be inconsistent, and ensures better adherence to the regulation. The EU regulation states that debt in excess of the 60% debt to GDP ratio must be reduced by at least one twentieth per year based on changes over the past three years. I remind Senators that the debt rule specifies that when the level of general Government debt exceeds 60% of GDP, the Government must reduce the debt by one twentieth of the difference between that level and 60%, not one twentieth of the whole debt.

The EU regulation goes on to provide for a transition period for member states, including Ireland, that were subject to an excessive deficit procedure on 8 November 2011. This transition period means that the general rule will only apply three years after the correction of the existing excessive deficit. Our existing excessive deficit will be corrected in 2015 when our general Government deficit is targeted to be just under 3% of GDP. This means that the one twentieth rule will fully apply in 2019. In the meantime, it is required that there is satisfactory progress in reducing the debt to GDP ratio, and this will be assessed by the Commission and ECOFIN.

Section 5 provides for the requirements in Articles 3.1.b and 3.1.d of the stability treaty in relation to the setting of the medium-term budgetary objective or MTO under the Stability and Growth Pact. The MTO results from the requirements of EU Regulation 1466/97. It is a calculated figure and what the stability treaty and this section say is that, notwithstanding the result of the calculation, the lower limit of the MTO is an annual structural deficit of the general Government of minus 0.5 % of GDP. In line with the stability treaty, the section provides that when the debt to GDP ratio is significantly below 60% of GDP, the lower limit is changed to minus 1% of GDP. In most countries, this situation will not arise for the foreseeable future. Ireland's current MTO is minus 0.5% of GDP.

Section 6 has been changed substantially from the general scheme, as it provides for the correction mechanism that member states are required to put in place under the stability treaty. The correction mechanism has been drafted in light of the now available common principles from the European Commission. This section provides that the Government shall present a plan that specifies the corrective measures it will take if there is a significant deviation from the medium-term objective or from the agreed convergence path towards that objective.

Reference is made in the section to Article 6.3 of EU Regulation 1466/97 which defines a significant deviation as 0.5% of GDP in a single year or 0.25% of GDP in two consecutive years. The correction plan, which must specify the period covered and the revenue and expenditure measures to be taken, has to be consistent with recommendations made to the state under the Stability and Growth Pact in relation to the period over which the correction will take place and the size of the measures to be taken.

Provision has also been made in this section for the Government to lay a statement before the Dáil outlining the steps it intends to take if a significant deviation is likely to occur in the future. This was added into the Bill as the common principles allow for an option for either ex anteor ex postactivation of the correction mechanism. Credible fiscal management suggests that it would be prudent to address both circumstances. This is a sensible and prudent measure, as it would be very difficult for the Government to refuse to take action on an ex antebasis if, for example, its own forecasts projected a significant deviation.

Section 7 provides for the establishment of the Irish Fiscal Advisory Council, or fiscal council, on a statutory basis, which will operate in accordance with the Schedule. Section 8 provides that the fiscal council shall be independent in the performance of its functions and assigns it the function, as required under the stability treaty, of monitoring compliance by the Government with the duty imposed on it by section 2.

In light of the finalisation of the common principles, some further clarification was required in the Bill on the duties of the fiscal council in relation to the stability treaty. The common principles require that the fiscal council's monitoring and assessments should cover whether there has been a significant deviation from the agreed fiscal targets, exceptional circumstances have begun or ceased, and if a correction is proceeding in according with the corrective plan. The common principles also require governments to comply with the above assessments or explain publicly why they are not complying. Provision has been made to fulfil this requirement.

Provision also must be made for the other functions assigned to the fiscal council by the Government.

These functions, which were included in the general scheme, are to assess the official macroeconomic and budgetary forecasts of the Department of Finance and assess the appropriateness of the fiscal stance of each budget and stability programme. The fiscal council is required to publish its assessments within ten days of giving a copy to the Minister for Finance.

Section 9 provides for the regulation-making powers required by the Bill. A residual power to make regulations if the common principles change has been retained but it can only be used if the resulting changes are not substantive. Section 10 is the standard section for expenses incurred in the administration of the Act. Section 11 provides for the Short Title and the commencement provisions. The Schedule sets out the provisions with regard to the establishment and operation of the fiscal council, including membership, terms of office and staffing. These measures are to ensure the fiscal council's independence is protected and guaranteed, which is vital to its performance of its role.

In addition to measures which I will detail further, the fiscal council's mandate is also protected, and cannot be altered without legislative action. The fiscal council will have five members appointed for staggered terms of four years. This does not include the current members, some of whom will serve shorter terms to rotate their end dates. The Schedule also lays out the details of the appointment of members to the fiscal council. These members will be chosen with regard to the desirability of their having competence and experience in domestic or international macroeconomic or fiscal matters and, to the extent practicable, ensuring an appropriate balance between men and women in the membership of the fiscal council.

There are a number of key differences in the provisions for this body compared to most other non-commercial State agencies. These differences result from the need to ensure the fiscal council meets the independence requirements of the common principles. The principal issues are that the termination of the appointment of a fiscal council member by the Minister on the grounds set out in section 4(2) of the Schedule will require a motion of approval from Dáil Éireann; and the fiscal council will be funded from the Central Fund for expenditure incurred in the performance of its functions up to a ceiling of ¤800,000 per annum, which will be indexed to the harmonised index of consumer prices. This will ensure the fiscal council's annual budget is guaranteed, unless a future Oireachtas decides to amend this provision.

One amendment was made to the Bill during its passage through the Dáil, with regard to paragraph 10(2) of the Schedule. The reference to "accounting officer" was changed to "the officer accountable" and the reference to "appropriation accounts" was removed. Both are legal terms in the Comptroller and Auditor General Acts and do not apply to bodies such as the fiscal council. This amendment does not change the original intent and purpose of paragraph 10(2).

I look forward to a constructive debate on the Bill. The purpose of the Bill is to give full effect to the decision made in the referendum on the stability treaty. The Bill will facilitate stable economic governance in Ireland and ensure more controlled fiscal structures. This will also allow us to ratify the stability treaty in line with our fellow euro area member states. It is in the interests of the country and the euro area. Therefore, I urge Senators to support the Fiscal Responsibility Bill 2012 which I commend to the House.