Róisín Shortall (Dublin North West, Social Democrats)
Link to this: Individually | In context | Oireachtas source

189. To ask the Minister for Finance further to box one on page C.22 of the budget book, when each of the adjustments to the fiscal space calculation became known to his Department; and the reason these were not flagged as part of the pre-budget process with the budgetary oversight committee or to opposition Deputies well in advance of the budget. [30620/16]

Michael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

198. To ask the Minister for Finance the way in which the fiscal space for 2017 moved from expected circa €1 billion to circa €1.2 billion on budget day in view of his previous comments that the fiscal space for 2017 could not change; and if he will make a statement on the matter. [30818/16]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I propose to take Questions Nos. 189 and 198 together.

The Department of Finance produces the macroeconomic and fiscal forecasts underpinning Ireland's Stability Programme Update and the annual Budget process. Forecasts of fiscal variables including available fiscal space are routinely updated in these publications.

I have outlined previously that the fiscal space in 2017 was largely fixed but was subject to certain moving parts. In aggregate, revisions caused an increase in fiscal space of some €200m or approximately ¼ of a percent of the overall general government expenditure of €76.6 billion forecast for 2017.

The fiscal space available for Budget 2017 is reconciled with the estimate published in the SES in Box One of Chapter 3 in the Economic and Fiscal Outlook in the Budget book 2017, the details of which I will revisit here.

For 2017, the reference rates and convergence margins were set by the European Commission in its Spring forecast published in May. However, the GDP deflator used is an average of the Commissions Spring and Autumn deflators. As the Commission's Autumn forecasts will not be published until after Budget 2017, this necessitates using the forecast for the deflator from the Department of Finance's Autumn forecasts published on Budget day.

My Department presented an estimate of this deflator to IFAC and the Budgetary Oversight Committee on October 4th as part of the macroeconomic forecast that was endorsed by the Irish Fiscal Council on October 6th. The Budget deflator reflecting the impact of the 2017 budgetary package reduced fiscal space by €75m. The purpose of the Budgetary Oversight Committee appearance by my officials was to discuss technical aspects of the macro economic forecasts and not to discuss the fiscal situation or policy implications arising.

Revisions to the 2015 general government expenditure estimates were provided on a confidential basis to my Department following the first transmission of this data to Eurostat by the CSO on the 29th September. This data was subsequently published by the CSO in the Government Finance Statistics on October 10th. Revisions to the 2015 outturn have resulted in an update to the Department's estimate of the 2016 and 2017 expenditure base. Notably, the estimates of Gross Fixed Capital Formation (GFCF) were revised for the period 2012 to 2015. To avoid penalising spikes in government investment in GFCF, the European Commission allows this investment to be averaged over a four year period with the result that any changes to the levels of this investment will impact on available fiscal space.

As well as data from the CSO, revenue and expenditure surveys of the Local Authorities and other general government bodies are returned as part of the budgetary process, these also included updated forecasts of GFCF expenditure in 2016 and 2017 updating further the Department's estimates of the expenditure bases used. The combined effect of these changes to the estimates of GFCF expenditure in 2016 and 2017 has increased available fiscal space in 2017 by approximately €120m.

In my answer to the Deputy's other question today, I describe in detail the changes in fiscal space referred to in Budget Box 1 as Revised Carryover. As indicated, this has two elements the first being the impact of the revisions to the Revenue Commissioners methodology regarding the calculation of first year and full year costs of potential Budget tax packages. These changes took effect from June 2016 and the Revenue Commissioners pre-budget 2017 Ready Reckoner went live on 14th July.

The second element was the impact on the cost of indexation in 2017 on the revised tax base which was confirmed following the macroeconomic forecast endorsed by the Irish Fiscal Council on October 6th. These changes combined increased fiscal space by €155m.

Róisín Shortall (Dublin North West, Social Democrats)
Link to this: Individually | In context | Oireachtas source

190. To ask the Minister for Finance if he will provide a detailed breakdown of the €155 million adjustment that was made to the carryover effect of budget 2016. [30621/16]

Pearse Doherty (Donegal, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

196. To ask the Minister for Finance the impact the increase of €155 million will have on the State's compliance with the structural deficit target for 2016 and the expenditure benchmark for 2016 (details supplied); and if he will make a statement on the matter. [30755/16]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I propose to take Questions Nos. 190 and 196 together.

At the time of the Summer Economic Statement (SES) it was estimated that there would be c. €1.0 billion in fiscal space for 2017. Amongst other things, this consisted of c. €340 million of carryover from Budget 2016 measures, of which income tax and USC accounted for approximately €292 million. In addition, it was also estimated that the non-indexation of the income tax system in 2016 would yield €300 million in 2016, with a positive carryover of approximately €100 million into 2017.

However, since the SES, the Revenue Commissioners have updated their method of estimating the first and full year costs of tax measures with effect from July 2016. This followed an analysis of the first year/full year apportionment of costs which was undertaken to ensure the estimated apportionment is as accurate as possible. Accordingly, from earlier this year, a larger proportion of the costs/yields of such measures are attributed to the first year, which results in a lower carryover cost in the second year. It should be noted that this does not change the full-year cost of a measure, only the allocation of that cost between first year and carryover costs. Therefore, as a result of Revenue's revised methodology, it is anticipated that more of the cost of the income tax and USC package from Budget 2016 is being incurred in 2016 than was previously estimated. In addition, the carryover cost from the non-indexation of the income tax system in 2016 has also been reduced.

Table 1 at time of SES illustrates the impact of the carryover effect of Budget 2016 measures and non-indexation of income tax system in 2016:

Table 2 Budget 2017 illustrates the impact of Revenue's revised methodology on the carryover effect of Budget 2016 measures and non-indexation of income tax system in 2016:

Therefore, the tables above account for c. €70 million of the €155 adjustment to the carryover effect into 2017. The balance of €85 million is accounted for as follows.

At the time of SES, it was estimated that the non-indexation of income tax system in 2017 would yield €300 million in 2017 and €400 million a full year. However, applying Revenues revised methodology and taking account of the updated 2017 tax base and macroeconomic drivers, it now estimated that the non-indexation of the income tax system in 2017 would yield c. €385 million and €450 million in a full year, which accounts for the balance of €85 million in 2017.

The impact of these changes on the expenditure benchmark rule in 2016 was to increase the fiscal space used in the year by €70m as detailed in tables above. However as the Deputy will be aware, there is a significant buffer built into the calculation of Ireland's compliance with the expenditure benchmark in 2016, due to the treatment of the conversion of the AIB preference shares to ordinary shares as a capital transfer (expenditure) rather than a reinvestment of capital. This €70 million does not compromise compliance with the expenditure benchmark rule in 2016.

The impact of this €155 million on compliance with the expenditure benchmark for 2017 (as detailed in Box 1 page C.22 in the Budget 2017 book) gives an extra €155m of fiscal space, thereby explaining a significant portion of the €200 million change in fiscal space.

As regards compliance with the structural deficit target, the impact of the €155 million on the pace of improvement in the structural balance 2016 is marginal, at 0.02p percentage points of GDP. As such, it should have no material impact upon reaching the Medium Term Objective, that is, a structural deficit of -0.5 of GDP by 2018.