Pearse Doherty (Donegal, Sinn Fein)
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298. To ask the Minister for Finance the consequences of the State being found to be in a situation in which a significant deviation has occurred under the fiscal rules; and if he will make a statement on the matter. [28082/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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There are mechanisms for addressing non-compliance with the fiscal rules both domestically and in an EU Regulation, Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coodination of economic policies. The Fiscal Responsibility Act of 2012 enshrines fiscal policy rules in law and established the Irish Fiscal Advisory Council (IFAC) as the independent body at national level with responsibility for monitoring observance of the fiscal rules.

Under the Regulation, the European Commission is required to address a warning to a Member State in the event of a significant observed deviation from the adjustment path towards the medium-term budgetary objective. With regard to the structural balance, a significant deviation is defined as being at least 0.5% of GDP away from the adjustment path in a single year or at least 0.25% of GDP on average per year in two consecutive years. With regard to the expenditure benchmark, a significant deviation is one that has a total impact on the general government balance of at least 0.5% of GDP in a single year or cumulatively in two consecutive years. Within one month of the warning, the Council is required to examine the situation and adopt a recommendation for the necessary policy measures to correct the deviation by a set deadline.

Under the Fiscal Responsibility Act 2012 and in line with the requirement in the Fiscal Compact that a correction mechanism shall be triggered automatically, the Government is required to prepare and present a corrective action plan to Dáil Éireann within two months of either the warning of a significant deviation from the European Commission or if the Government consider that there is a failure to comply with the budgetary rule which constitutes a significant deviation. The corrective action plan must specify the period over which the significant deviation will be corrected, set annual targets if the period is longer than a year and specify the size and nature of the revenue and expenditure measures to be adopted. Furthermore, the plan must be consistent with the recommendation addressed to Ireland by the Council.

The European Commission monitors compliance with the Council recommendation. If the MS does not take effective action within the relevant deadline, the Council will make a second recommendation on the lack of effective action and a revised recommendation on action to be taken. If following this there is no action the MS is subject to an interest bearing deposit of 0.2 per cent of GDP. If the MS subsequently takes effective action to correct the deviation the deposit plus interest is returned.

Separately, IFAC monitors compliance by the Government with the corrective action plan presented to Dáil Éireann. If this assessment find non-compliance, then the Government is required to take steps to restore compliance or, if the Government does not accept the assessment, the Government must prepare and lay a statement before Dáil Éireann within two months.

However, subject to the nature and severity of a significant deviation, there would be a high potential for adverse debt market outcomes. Bond yields in the secondary market for Irish debt would be likely to increase. If such increased yields persisted, then the cost of raising debt to fund new expenditure or to role over maturing bonds would increase and this would feed through to the general government balance. Increasing debt cost would reduce the money available for expenditure and tax reform.