Next Government may have €2.5bn more to play with

A new Irish Government has yet to be formed post-election but EU fiscal rules have not gone away and to that end the Department of Finance has just published its annual Stability Programme Update (SPU) which has to be submitted to the European Commission  by the end of April. The SPU sets out medium term fiscal and debt projections based on updated economic forecasts. The publication would also normally provide a detailed breakdown of the monies available to the government of the day given the constraints imposed by Brussels in order for Ireland to comply with the Stability and Growth Pact. However, in this case, there is no detailed breakdown of the ‘Fiscal Space’ available to the incoming administration, although it is possible to arrive at some broad conclusions given other published information. On that basis it seems there may be more Space available than previously envisaged, as much as  €0.5bn annually over the next five years.

Irish GDP growth emerged at 7.8% in 2015, well above any earlier forecasts, which has prompted a rise in the consensus estimate for the current year. Consequently it is not a surprise that the SPU has also revised up the official  growth forecast for 2016, to 4.9%, from the initial 4.3% underpinning the  Budget. That has not resulted in any change to forecast tax receipts, although other minor revisions mean that the General Government deficit is now expected to be marginally lower that previously projected, at 1.1% of GDP instead of 1.2%.

The EU rules impose limits on the growth of government expenditure (net of certain adjustments like unemployment benefits, debt interest and capital spending) with that limit depending on  the economy’s potential growth rate averaged over a decade. A key development in the SPU  is that Ireland’s potential growth of late is now estimated to be much higher than previously thought. In 2015, for example, potential growth was estimated at 3.4% but is now put at 4.4%, with a figure of 5% now seen for both 2016 and 2017. In addition , Irish Government expenditure  in 2015 has been revised up by €1.5bn (reflecting a reclassification of State transactions with AIB ) which therefore raises the expenditure  benchmark. These two changes mean that spending can now rise by  a greater amount while still complying with the fiscal rules.

In the 2016 Budget, for example, the Government was limited to a €1.2bn increase in spending (net of any tax change) and this Fiscal Space was fully realized. It now appears that the figure could have been higher, perhaps €1.7bn.  In 2017, the gross Fiscal Space  available was estimated  at €1.3bn but  may well be above that given these new figures, at €1.7bn or €0.9bn  in net terms when allowing for  known demographic pressures on spending  and  other existing  expenditure commitments. This net Fiscal Space figure compares with the €0.5bn previously published.

Further out in time, the higher GDP growth figure will boost the Fiscal Space , as will the EU decision to allow Ireland to aim for a small budget deficit (0.5% of GDP) rather than the budget balance target previously agreed. The  result is that the  net Fiscal Space available over the five years from 2017 to 2021 may be around €11bn , rather than the €8.5bn previously published by Finance. How those resources are allocated will be up to the new government, although one should note that they make no allowance for any broad based increases in public sector pay and may underestimate the pressures on the Health budget.  Of course the government also has the option to eliminate the deficit completely and to run down  the national debt at a faster clip, by choosing not to utilize all the available Fiscal Space, but that appears unlikely given the present political backdrop.

 

Published by

Dan McLaughlin

Economics Lecturer and Commentator