What to do with the €3bn?

The Government has decided to proceed with the sale of 25% of AIB, and has indicated that it expects to raise around €3bn from the transaction. What to do with the money has been the source of some political debate, although the constraints imposed by the EU’s fiscal rules may leave the authorities with little room to manoeuvre.

The proceeds of the sale will not affect the General Government balance , as under Eurostat rules it is classed as a financial transaction , merely  exchanging one type of asset within general government for another, in this case cash. However, the €3bn inflow will impact the Exchequer Borrowing Requirement (EBR), the  deficit on a cash flow basis. The 2017 Budget made no allowance for  any sale proceeds and projected a €2bn EBR  so on the face of it the Exchequer may now emerge with a €1bn surplus at end-year, assuming the initial underlying target is achieved .

The Budget also indicated that the NTMA would  over-fund in 2017 (i.e issue more debt than required to finance the EBR and to cover redemptions)  so in sum gross Government debt was projected to rise by around €4bn, to  €204.6bn or 72.9% of forecast GDP. Adding in the AIB proceeds would therefore reduce the forecast debt level to €201.6bn, or 71.9%.

The limited impact on the debt ratio ( just 1 percentage point) has prompted some to question whether the money might be better utilised to fund capital or even current spending, with most of the argument centred on the former. Whether this would be wise given that the economy is operating at or even above potential is one consideration, albeit not an argument one often hears from politicians, but there is a more significant constraint; Ireland is subject to the budgetary rules of the EU’s Preventive Arm, designed to reduce the risk of utilising one-off receipts, like the AIB monies, to fund increases in spending.

To that end an Expenditure Benchmark is in place setting a limit on the level of General Government spending ( Fiscal Space) allowed, net of any taxation changes, and the AIB  proceeds are not classed as General Government revenue. Capital spending, it could be argued, differs from current spending in that an asset for the State is created, but total capital spending is not exempt from the spending rule, only any increase relative to a 4-year average. For example, if the Government announced it intended to spend €6bn next year and the 4-year average was €4bn, a net €2bn would be exempt from the Expenditure Benchmark, However, the €6bn would obviously boost the  Budget deficit, which is also subject to EU rules, in this case a requirement to reduce it by at least 0.5% of GDP when adjusted for the economic cycle.

Putting the money aside or into a special fund would make no difference in terms of the above constraints. Ireland could simply ignore the rules, of course, and de facto there seems little prospect of any State being fined for a breach, but one doubts if there would be any appetite from the current Administration for such a move, as it risks alienating  key European partners amid Brexit negotiations .