Pearse Doherty (Donegal, Sinn Fein)
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296. To ask the Minister for Finance further to parliamentary Question No. 143 of 30 May 2017, the impact on the fiscal space in 2017 and the following years if his Department fails to persuade the EU Commission that the retrospective change cited should not be made; and if he will make a statement on the matter. [28080/17]

Pearse Doherty (Donegal, Sinn Fein)
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297. To ask the Minister for Finance if, as per the council recommendation on the 2017 national reform programme for Ireland COM (2017) 507 final, further fiscal adjustments are required in 2017 in order to comply with the fiscal rules; and if he will make a statement on the matter. [28081/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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I propose to take Questions Nos. 296 and 297 together.

As the Deputy is aware projections of revenue and expenditure, as set out in Budget 2017 last October, were assessed as being broadly compliant by the European Commission. This included an expected deviation under the expenditure benchmark of approximately €200 million in relation to increased national contributions to the EU Budget.

The European Commission published its recommendation for a Council Recommendation on the 2017 National Reform Programme of Ireland and delivering a Council opinion on the 2017 Stability Programme of Ireland on the 22May 2017. Recital eight of the Commission's recommendation calls for Ireland "to achieve an annual fiscal adjustment of 0.6% of GDP towards the medium-term budgetary objective in 2017".

This relates to the required improvement in the structural balance. The Commission's assessment of the 2017 stability programme for Ireland shows that, while there is a deviation under the structural balance pillar, its own forecasts show Ireland as being compliant in 2017.

In regards to the structural balance, both the Commission and Ireland have repeatedly stated that the output gap methodology is subject to considerable volatility and is unsuitable for a small and open economy such as ours. The Commission recommend the expenditure benchmark as the more appropriate reflection of underlying fiscal effort.

In its assessment under the expenditure benchmark pillar the Commission show a deviation in both 2016 and 2017. In the two-year assessment these deviations combined constitute a significant deviation. In its Ex-post Assessment of compliance with the Domestic Budgetary Rule 2016, the Irish Fiscal Advisory Council showed that we were strongly compliant in 2016.  Therefore we could not have a significant deviation under the two-year assessment. This is only possible with retrospective implementation of a methodological change agreed in late 2016, which is what the Commission show in the DG ECFIN staff Assessment of Ireland's 2017 stability programme.

As I set out in my answer to PQ 143 of 30 May 2017, the Commission’s 2017 version of the Vade Mecum on the stability and growth pact states that “compliance with already adopted Council recommendations will continue to be assessed on the basis of methodologies described in the 2016 version of the Vade Mecum”

In future, the Commission will take one-offs systematically into account in the assessment process.  However in my view, it cannot be retrospectively applied to 2016 expenditure benchmark assessment or to the 2016/2017 average.  My officials have raised this at European level and the Commission have admitted that there may be legal uncertainty with the approach taken its assessment methodology. My officials continue to engage bilaterally with the Commission on this point.

It is not possible to estimate the impact of this methodological change on fiscal space in future years because it will depend on the one-offs that occur.

The European Commission published its recommendation for a Council Recommendation on the 2017 National Reform Programme of Ireland and delivering a Council opinion on the 2017 Stability Programme of Ireland on the 22 May 2017. My officials are currently examining the recommendation and the Commission staff's assessment of Ireland's 2017 Stability Programme Update.

Recital eight of the Commission's recommendation calls for Ireland ‘to achieve an annual fiscal adjustment of 0.6% of GDP towards the medium-term budgetary objective in 2017. Based on the Commission's 2017 spring forecast, there is a risk of a significant deviation from the recommended fiscal adjustment over 2016 and 2017 taken together’.

The EU Commission’s own forecasts estimate that the required 0.6% of GDP improvement in Ireland’s structured balance will be delivered in 2017 and that the average deviation for 2016 and 2017 taken together is 0.1% of GDP. Accordingly, the reference to a risk above would appear to refer to the expenditure benchmark.

The Deputy should be aware that a methodological change was agreed in late 2016 to the way compliance with the expenditure benchmark will be assessed going forward. In future, the Commission will take one-offs systematically into account in the assessment process. However in my view, it cannot be retrospectively applied to 2016 expenditure benchmark assessment or to the 2016/2017 average. Indeed, the 2017 version of the Vade Mecum states that “in order to preserve Member States’ legitimate expectations, compliance with already adopted Council recommendations will continue to be assessed on the basis of methodologies described in the 2016 version of the Vade Mecum."

Nonetheless, the Commission appears to have retrospectively applied this change in its calculations and this would appear to be the basis of its statement. My officials are taking this issue up bilaterally with the European Commission.