Written answers

Tuesday, 22 September 2015

Department of Finance

Public Expenditure Statistics

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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296. To ask the Minister for Finance the maximum growth in public expenditure both in nominal and real terms allowable in 2016 under European Union rules; the manner in which EU expenditure rules will impact on the formulation of the budget; and if he will make a statement on the matter. [31655/15]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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In 2016 Ireland will enter the preventive arm of the Stability and Growth Pact (SGP) and will have to adhere to an adjustment path towards the medium-term (budgetary) objective (MTO), currently for Ireland a balanced budget in structural terms. This is assessed in two ways.  Firstly, until the MTO is reached, a minimum annual improvement in the structural balance is required. The second assessment is compliance with the expenditure benchmark.

Under this second pillar, public expenditure, in the absence of discretionary revenue measures, should grow in line with the potential growth rate of the economy, the latter estimated as an average over a ten-year horizon.  Furthermore, if a Member State is not at its MTO expenditure should grow at a rate that is sufficiently below the potential growth rate (allowing for a so-called 'convergence margin') in order to ensure rapid convergence towards the MTO.  The benchmark rate for expenditure growth is then calculated, taking into account projections for inflation in order to preserve the real value of expenditure.

The applicable benchmark reference rate for Ireland in 2016 is 1.9%. The convergence margin for 2016 is 1.8%. Therefore applying this to the 2015 general government expenditure aggregate gives real growth of 0.1%.

To adjust this for nominal terms, the GDP deflator is applied. This is the average of the European Commission's Spring and Autumn forecasts for 2016 for Ireland. While the former is available the latter will not be issued until November so the Department's forecast will have to be used in Budget 2016 calculations. In the Stability Programme Update in April 2015, my Department used a forecast of 1.5%. Using this and taking account of discretionary revenue measures primarily related to the indexation of the tax system and including carry forward from 2015 tax measures, the fiscal space was calculated to be €1.2bn to €1.5bn.

The Government stated in the Spring Economic Statement that this fiscal space would be split evenly between revenue and expenditure measures.

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