Pearse Doherty (Donegal South West, Sinn Fein)
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131. To ask the Minister for Finance the gross and net fiscal space available to the Government for each year from 2016 to 2021 if the structural balance improvement is maintained at 0.6 per cent per year during this period. [2734/16]

Michael Noonan (Limerick City, Fine Gael)
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Under the Stability and Growth Pact (SGP), Ireland is obliged to be at or make rapid progress towards its Medium Term Objective (MTO) of a balanced budget in structural terms. This obligation also stems from the Fiscal Compact, to which Ireland acceded following the referendum in 2012, and has also been enshrined in domestic legislation through the Fiscal Responsibility Act 2012.

As Ireland is not yet at its MTO, it must improve its structural balance by more than 0.5% of GDP per annum until the MTO is reached. In the Country Specific Recommendations (CSRs) adopted by the Council on 14^thJuly 2015 an improvement of 0.6% was stipulated for 2016.

The required adjustment for 2017 will be set in the CSRs to be adopted by the Council next July on the basis of a European Commission recommendation. The Commission has clarified over the last year the basis on which it will make its recommendation for an appropriate improvement in the structural balance for each Member State. Its analysis takes account of the debt-to-GDP ratio, the size and sign of the output gap and whether the economy is growing faster than potential. The matrix describing the required structural adjustment based on these criteria has been published by the Commission and is outlined below. The rationale for the differentiated approach is to better align the required fiscal adjustment with the prevailing economic environment.

Matrix for specifying the annual fiscal adjustment towards the Medium-Term Objective (MTO)

Accordingly the minimum level of the required improvement in the structural balance is set for each Member State in the CSRs addressed to them by the Commission and Council in accordance with the above matrix of requirements. So a 0.6% of GDP annual improvement would only be appropriate if Ireland's output gap falls into 'Normal times' in the above table. However, this may not be the case in any given year. The Deputy should also note that the structural balance does not have to be improved each year once the MTO has been achieved.

The fiscal space, as set out in Tables A8 and A9 of the Budget 2016 book, is calculated using the expenditure benchmark as this is a better guide for fiscal planning purposes in Ireland. The walk from gross to net fiscal space, which is set out in Table A9, takes account of planned expenditure on demographics, the Public Capital Plan and the Lansdowne Road Agreement as well as the possibility of not indexing the taxation system, which would count as a discretionary revenue measure if the Government of the day so decided.

The calculation of fiscal space is only affected by the structural balance in two circumstances. The first is if compliance with the expenditure benchmark does not also result in the required annual improvement in the structural balance, as discussed above. If this is the case, then use of the available fiscal space under the expenditure benchmark may have to be adjusted. However, over-achievement of the annual improvement in the structural balance does not change the amount of fiscal space available under the expenditure benchmark.

The second circumstance is that in the year following the achievement of the MTO, the convergence margin used in the calculation of fiscal space under the expenditure benchmark ceases to apply. A document outlining the 'Forthcoming Revisions to the Medium Term Budgetary Objective' was published on my Department's website on the 21^stJanuary 2016. This explains that the European Commission is currently updating the minimum Medium-Term Objectives (MTOs) of Member States in line with the three-year evaluation cycle. Due to the improvement in Ireland's debt ratio and other factors, it is likely that the MTO for Ireland (covering the 2017-2019 budgetary cycles) might be slightly less stringent than is currently the case. Staff in my Department estimate that, following technical discussions on the matter, a structural deficit of approximately -0.5 per cent of GDP rather than the current target of 0.0 per cent will need to be attained. Should the MTO be readjusted to such a level, thus making it more likely that the MTO will be achieved earlier than currently projected, there would be additional fiscal space in the year after the MTO is achieved. The resulting increase in fiscal space is estimated to be in the region of €1 to €1.5 billion.

New fiscal space projections which will take account of updated assumptions, as well as any update to the MTO, will be in the Stability Programme Update 2016which will published in April 2016.