Michael McGrath (Cork South Central, Fianna Fail)
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96. To ask the Minister for Finance his estimate of the size of the economy's output gap; the implications of this for the Government’s taxation and spending plans; and if he will make a statement on the matter. [3709/16]

Michael Noonan (Limerick City, Fine Gael)
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Estimates of the output gap set out in Table 11 of the Budgetary documentation point to a positive output gap in the region of 2-2 ½ percent of potential GDP in 2015-2016, with this gap gradually closing over the forecast horizon to 2021. These estimates are based on the harmonised methodology for calculating output gaps commonly agreed at EU level. It is important to stress that this methodology has several shortcomings when applied to a small open economy and my Department has highlighted these in the past.

Estimates of the output gap are used in the calculation of the structural budget balance.

To comply with the balanced budget rule, the fiscal rules require that Ireland must achieve a 0.6pp improvement in the structural balance until the Medium Term budgetary Objective (MTO) is met. Specifically, the minimum annual improvement in the structural balance must be consistent with what is set out in the Commission's matrix of adjustment based on the cyclical position of the economy. Currently the MTO equates to a 0% of GDP structural balance for Ireland, with the possibility this may shortly be loosened to -0.5% of GDP. Further clarification from the European Commission is expected on this in the coming weeks.

Importantly, estimates of the output gap will vary depending on both the level and composition of budgetary packages pursued by the next government. Changes to the annual estimate of the output gap, which are widely recognised as being particularly volatile in an Irish context, will in turn affect the annual pace of structural budgetary adjustment.

Future taxation and spending plans will need to be framed in the context of achieving a balanced budget in structural terms and accordingly, compliance with spending ceilings imposed by the expenditure benchmark rule.

As set out in Tables A.8-A.9 of the Budget book, compliance with the expenditure benchmark suggests the availability of fiscal space of €10.9 billion in gross terms over 2017 to 2021. A decision by the next government to pursue a less stringent MTO (of up to -0.5% of GDP) would add an estimated €1-€1.5 billion to this gross fiscal space. However, anticipated spending obligations such as the cost of demographics, the Public Capital Programme and the Lansdowne Road Agreement will have to be met from within this gross spending envelope.