Written answers

Tuesday, 25 May 2021

Department of Finance

Stability and Growth Pact

Photo of Patricia RyanPatricia Ryan (Kildare South, Sinn Fein)
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183. To ask the Minister for Finance if the growth and stability pact prevents the Government from borrowing to build houses; and if he will make a statement on the matter. [27610/21]

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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The EU's fiscal rules, as set out in the Stability and Growth Pact (SGP), are an integral part of the EU’s broader economic governance framework. The key components of the fiscal rules are a 3 per cent of GDP threshold for the headline deficit, a 60 per cent debt-to-GDP threshold, a balanced budget after adjusting for the economic cycle (measured by the structural balance) and the expenditure benchmark. The EU's fiscal rules do, therefore, place constraints on Member States' borrowing, both in a single year, through the deficit-limits, and over multiple years, through the debt-rule.

Last year, Ireland recorded a general government deficit of 5.0 per cent of GDP and a debt-to-GDP ratio of 59.5 per cent. However, as the Deputy will be aware, the normal operation of the fiscal rules has been suspended since March 2020, when the so-called General Escape Clauseof the SGP was activated. This clause allows Member States to depart from the regular budgetary requirements under the Pact in order to allow them to take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. The clause is in place for 2021 and the European Commission are shortly expected to give their view on whether it should be extended to 2022.

It is also important to recognise that under the normal operation of the SGP, the rules themselves do not limit the level of government expenditure. Additional public investment is always possible if it is matched by revenue-raising measures and/or offsetting expenditure adjustments elsewhere. In addition, to avoid penalising spikes in government investment, the framework allows investment to be smoothed over a four year period. This means that only one quarter of the increase in Gross Fixed Capital Formation (GFCF) will impact on compliance under the expenditure benchmark in that year. In this respect, it is important to bear in mind that Ireland has remained compliant with the fiscal rules while housing investment has more than doubled since 2016. Budget 2021 allocated a record level of funding to housing, reflecting the key priority Government is giving to this issue. At €3.1 billion, this is 41 per cent above the previous peak in 2008.

Looking forward to the post-pandemic period, we must recognise that there was evidence of an investment gap across Europe before the onset of the Covid-19 crisis. Prior to the pandemic, public investment remained below pre-financial crisis levels in several Member States. The role of the EU fiscal rules in creating or tackling this investment gap is a complex question but one which I believe we must consider at both a national and European level.

Early last year, the European Commission presented a formal review of the legislation underpinning the SGP, including the launch of a public consultation on the operation of the fiscal rules. Discussions around this review were paused to allow Member States to address the immediate challenges of the pandemic. The Commission have stated their desire to relaunch the public debate on the fiscal framework once the post-pandemic economic recovery takes hold. I believe addressing the investment gap in Europe should be a key part of discussions on the future of the framework.


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