Pearse Doherty (Donegal, Sinn Fein)
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252. To ask the Minister for Finance his views on whether the EU Commission should adopt a four-year potential output forecast horizon for reasons outlined in documents (details supplied); if Ireland has given any view on this issue at ECOFIN or any other EU institutional meeting; and if he will make a statement on the matter. [25161/16]

Michael Noonan (Limerick City, Fine Gael)
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Work is continuing at European level to improve the predictability and stability of the agreed methodology used to calculate potential output. As part of this, the merit of extending the forecast horizon applied by the European Commission when implementing this methodology, from two years, as current practice dictates, to four years, is currently under review. At present, the three and four year ahead forecasts are determined soley by mechanical rules. Effectively, this proposal places greater weight on judgemental as opposed to such purely mechanical estimates for three and four-year ahead forecasts.

Discussion on this issue are continuing at technical level in the Output Gap Working Group, which is a sub-group of the Economic Policy Committee. At this stage, consensus across a range of technical aspects remains to be achieved.

At a technical level my Department is broadly in favour of the proposal. Adopting this proposal would ensure consistency across Member States' application of the methodology. As a result, greater ex-ante certainty around the evaluation of public finances could be achieved. In this context, it should be noted that my Department's three and four year-ahead forecasts are in line with the current practice approach used by the Commission.  Consequently, differences in estimates of the structural balance due to horizon mismatch between my Department and the Commission has not arisen. In contrast, a discrepancy between how other Ministries and the Commission apply this methodology motivated the 8 signatories of the 18 March letter addressed to Vice President Dombrovskis and Commissioner Moscovici.

An extension of the forecast horizon used by the Commission would also have the added benefit of improving how structural reforms are assessed.  However, there are also drawbacks to a longer time horizon. These warrant careful consideration and include difficulties associated with producing accurate economic forecasts at longer time-horizons, and the increased scope for introducing bias into the forecasts.

My officials continue to engage at technical level along the above lines on these important issues. Furthermore, the Chief Economist of my Department is chair of the Output Gap Working Group where these technical discussions are taking place.

My Department will continue to advocate for improvements in the harmonised methodology and will continue to engage constructively in ongoing discussions on this and other relevant technical issues.