Michael McGrath (Cork South Central, Fianna Fail)
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89. To ask the Minister for Finance his estimate of the revised net fiscal space that would arise in each of the years 2017 to 2021 in the event of real gross domestic product growth for each of the years 2016 to 2021 being 1%, 2% and 3% less than currently forecast; and if he will make a statement on the matter. [20330/16]

Michael Noonan (Limerick City, Fine Gael)
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Estimates of fiscal space based on the expenditure benchmark are unaffected by changes in actual GDP. Instead, the relevant input is the estimate of the potential growth rate of the economy, as estimated by the European Commission each Spring.

The rationale for this is simple: budgetary policy should not be pro-cyclical.  In other words, fiscal space should not increase when there is a cyclical improvement in the economy and, similarly, fiscal space should not reduce when there is a cyclical downturn. 

Fiscal space would be affected in the event that the potential (or trend) growth rate of the economy was to slow, i.e. there is a permanent slowdown in the pace at which the economy can grow without generating inflationary pressures.

A reduction in the trend growth rate of 1 per cent each year over the next five years relative to the baseline forecast set out in the Stability Programme would reduce the expenditure benchmark reference rate (i.e. the average potential growth rate calculated over a ten-year period) by an average of 0.6 pp per annum.

On this basis, if the potential growth rate for each of the years 2016 to 2021 is 1, 2 and 3 per cent less than currently forecast, the impact on fiscal space is outlined in the following table.

These estimates should be treated with caution and are subject to revision, given that a number of simplifying assumptions must be made in order to provide these estimates.  For instance, the assumption is made that the MTO is still achieved in 2018.  Furthermore, these estimates are based on total expenditure remaining unchanged. It is, of course, difficult to envisage that a 2-3 per cent lasting shock to the potential growth rate would not have further impacts on other inputs into the Expenditure Benchmark calculation.