Michael McCarthy (Cork South West, Labour)
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66. To ask the Minister for Finance the consequences for the State in not adhering to the medium term budgetary obligation of the fiscal compact; and if he will make a statement on the matter. [39819/15]

Michael Noonan (Limerick City, Fine Gael)
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In 2016 Ireland will enter the preventive arm of the Stability and Growth Pact (SGP). Countries in the preventive arm must attain the Medium Term Objective (MTO) or be on an appropriate adjustment path towards it.  The MTO is the central concept of the preventive arm that serves to ensure sustainable public finances and compliance with the 3% of GDP deficit criterion in all but the most unusual adverse circumstances.

If the European Commission observes that a Member State has a significant deviation[1]from the MTO or the adjustment path towards the MTO, it will issue a warning to the Member State. Within one month of the adoption of a Commission warning, the Council will adopt a recommendation on the necessary policy measures and will set a maximum deadline of five months for implementation of the actions. If the situation is considered serious and urgent, a three month deadline may be set for effective implementation. Nationally, under the Fiscal Responsibility Act 2012, the Government must prepare and lay before the Dáil a correction plan within two months. The plan must be consistent with the Council's recommendations. Under the Act, the Irish Fiscal Advisory Council is responsible for monitoring if a plan is required and if a plan is performing.

If the Member State does not take effective action within the relevant deadline, the Council can make a decision to this effect by a qualified majority vote. If the Council rejects the decision and there is still no effective action by the Member State, the Commission can bring forward the recommendation again after one month and it is deemed to be adopted by the Council unless there is a simple majority to reject it within 10 days.

This leads to the start of the sanction procedure for euro area Member States. Within 20 days of the adoption of a Council decision on no effective action, the Commission shall issue a recommendation for a new Council decision, requiring the Member State to lodge an interest-bearing deposit equal to 0.2% of the previous year's GDP with the Commission. The Commission's recommendation is deemed to be adopted unless it is overturned by a qualified majority vote.  The deposit may be reduced or cancelled by the Council on grounds of exceptional circumstance or reasoned request if the Commission recommend this approach. If the Member State subsequently takes effective action, the deposit plus interest will be returned.

I have outlined above the procedural consequences of a significant deviation from the MTO or the adjustment path towards the MTO. There are also a number of practical consequences of persistent failure to meet the MTO or the required adjustment towards the MTO.  In the first instance, the commencement of procedures relating to a significant deviation, let alone reaching the point of sanctions for failure to take effective action, would be likely to result in reputational damage with a series of increasing adverse reports from the European Commission and independent bodies such as the Irish Fiscal Advisory Council. There is also the unknown market reaction to such an event and how this would impact on the State's ability to borrow and the subsequent debt servicing costs.  Furthermore, going down this path would increase the risk that the State would not meet the 3% of GDP deficit limit in time and be made subject to the corrective arm of the SGP, which has its own suite of recommendations, monitoring and sanctions.

However, compliance with the obligations of the preventive arm of the SGP is not and should not be primarily about avoiding sanctions and the wider market consequences that would be likely to follow.  It is about ensuring sustainable public finances and lower debt levels.  Doing so is the best way to avoid future crises arising from domestic sources in our public finances and to protect ourselves against crises arising from matters beyond our control because it will assist in the rebuilding of our fiscal capacity or ability to borrow, if needed in the future. Finally, balancing the budget in structural terms allows the automatic stabilisers play a counter-cyclical role in supporting aggregate demand.

A deviation is considered significant if it is greater than 0.5% of GDP in one single year or 0.25% of GDP on average per year in two consecutive years