Michael McGrath (Cork South Central, Fianna Fail)
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103. To ask the Minister for Finance his views on whether Ireland will be in breach of the fiscal rules in respect of the structural rule and the expenditure benchmark in 2017; his further views on whether sanctions will be brought against Ireland; and if he will make a statement on the matter. [30702/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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The two key pillars of the Preventive Arm of the Stability and Growth Pact (SGP) are the Balanced Budget Rule, which uses the structural balance and the expenditure benchmark. A deviation in excess of 0.5 per cent of GDP from either or both of the rules may lead to a warning of a significant deviation from the European Commission following an overall assessment that takes all relevant factors into account.  If a warning of a significant deviation is made to Ireland by the European Commission, then the Government has two months to prepare a corrective action plan and present it to the Dáil.  It would only be in the event that Ireland takes no effective action to correct the significant deviation in line with Council recommendations that the issue of sanctions arise in the form of an interest bearing deposit of up to 0.2 per cent of GDP.  Importantly, a warning of a significant deviation requires it to be an observed outcome, i.e. it must be ex-post.  This means that any warning in relation to 2017 or 2016 and 2017 taken together could only be made following the assessment of the 2018 Stability Update Programme that will be submitted at the end of April 2018.

The European Commission's Spring Economic Forecasts project a structural balance improvement of 0.6 per cent of GDP in 2017, which is the required level of improvement.  Taking 2016 and 2017 together, the Commission forecasts a risk of some deviation but well below the level of a significant deviation. My Department forecasts a structural improvement of 0.3 per cent in 2017, which does not constitute a significant deviation.  Importantly, my Department estimates that Ireland remains on track to achieve our medium-term objective (MTO) of a structural deficit of 0.5 per cent of GDP in 2018. Achievement of the MTO represents an important milestone in ensuring the sustainability of the public finances.

With regard to the expenditure benchmark, my Department estimated that there would be a deviation in 2017 at Budget time last October due to the increase in the EU Budget contribution. Based on the forecasts in the SPU, this projected deviation has increased to c.€450 million (0.16 per cent of GDP) for a number of reasons.  The key one is that the expenditure outturn for 2017 came in lower than projected in Budget 2017.  Taking 2016 and 2017 together, my Department is forecasting a small deviation (c.0.1 per cent of GDP).

On the other hand, the European Commission is forecasting a risk of a significant deviation under the expenditure benchmark taking 2016 and 2017 together.  The background to this is that the commission is retrospectively applying an amendment to assessment of compliance that was agreed in late 2016. This new methodology will take one-offs into account in the assessment process.  Retrospective application removes the AIB share transaction in 2015 from the assessment, thus changing the 2016 assessment from a positive deviation to a negative deviation, albeit not a significant one.

In my view, this methodological change cannot be retrospectively applied and should not affect the 2016/2017 average compliance. The Commission have admitted that there may be legal uncertainty with the approach taken in its assessment methodology and my officials continue to engage bilaterally with the Commission on this issue.