Pearse Doherty (Donegal South West, Sinn Fein)
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305. To ask the Minister for Finance the reference rate and convergence margin for the years 2017 to 2020, when estimating the structural balance in the 2015 stability programme update. [20647/15]

Michael Noonan (Limerick City, Fine Gael)
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Firstly, I wish to clarify for the Deputy that projections of the structural balance set out in the 2015 Stability Programme Update (SPU) are not estimated using either the reference rate or convergence margin. Rather, the structural balance is calculated using a measure of the output gap (based on potential GDP growth) which is set out in Table 15 of the SPU.

In contrast, the two concepts referred to by the Deputy - the reference rate and the convergence margin - are used to determine permitted expenditure growth under the other metric used to assess compliance with the preventive arm of the Stability and Growth Pact - the expenditure benchmark.

The 2015 SPU set out an illustrative, ex ante application of the expenditure benchmark for 2016 on the basis of a reference rate of 1.9 per cent. This is based on the latest European Commission estimates of Ireland's potential GDP growth rate over the years 2010 to 2019.

In light of major issues raised by myself at the March ECOFIN meeting and followed up at a technical level by officials in my Department, the Commission has amended the way the 10-year average potential growth rate is calculated for all Member States. The 10-year average reference rate is now calculated annually rather than every three years.  This will allow greater levels of expenditure consistent with the expenditure benchmark for Ireland than was previously the case when reference rates were set for a three-year period. This is because with an annual update in the rate, the impact of the weak potential GDP growth rates evidenced during the crisis drop out earlier than would previously have been the case and this is a more realistic approach.

On a purely technical basis, the reference rate consistent with the European Commission's Spring 2015 forecasts for Ireland's potential GDP growth would rise to 2.2 per cent in 2017 increasing steadily up to 2.7 per cent in 2020.

The convergence margin used in the illustrative application for 2016 in the SPU is 1.8 per cent. The European Commission, in its assessment of compliance with the expenditure benchmark, will also now update the convergence margin on an annual basis. However, as the Commission does not publish projected primary expenditure ratios beyond 2016, it is not possible at this point to derive a consistent estimate of the convergence margin for the years out to 2020.