The latest playbook for the Stability and Growth Pact has been published by the European Commission. Here is a link to the document along with two related press releases.
- Making the best use of the flexibility within the existing rules of the Stability and Growth Pact
- Commission issues guidance to encourage structural reforms and investment
- Frequently Asked Questions
We now have this little matrix:
The Commission’s methodology puts Ireland’s output gap at close to zero so we are in “Normal times". With public debt above 60 per cent of GDP this means that an improvement of greater than 0.5 per cent of GDP in the structural balance is required.
The numbers released with October’s budget would suggest that Ireland is on schedule to achieve this.
This shows an average annual improvement in the structural balance out to 2018 of just over 1.0 per cent of GDP. But these numbers come with a massive health warning. The projections in the outlook are set in terms of the following qualification:
As there are still uncertainties with regard to the interpretation and implementation of the fiscal rules, there is a technical assumption that voted expenditure ceilings remain fixed at 2015 levels. Similarly, taxation measures for the outer years are not embedded in the budgetary numbers at this stage. Priorities, which have been outlined in the Budget and Expenditure Report, will be addressed in subsequent Budgets when there is technical clarity around the quantum of fiscal space.
So no provision has been made for the promised tax cuts and expenditure increases that are being wheeled out on a regular basis.
The Commission document has lots of stuff on how they intend to account for the unknown impact of future reform measures on the unknowable structural balance. If there are going to be new caveats and qualifications every time a country is close to breaching the rules there is a risk that the SGP might become complicated!
From Ireland’s perspective it must be realised that while rules can be good they can never be perfect and there appears to be a risk that our fiscal policy becomes fixated on doing just enough to satisfy the SGP rules. There are frequent references to the amount of “fiscal space” that is available. This will be set relative to the Expenditure Benchmark which is likely to get increased attention when we become subject to it in 2016 upon leaving the EDP.
However, with a continuing deficit and a debt north of 100 per cent of GDP there is close to no fiscal space. In the run-up to the crisis Ireland’s budgets satisfied the rules that were in place at the time. We reached and then stayed at the MTO of a balanced budget but that was no protection against the budgetary collapse that occurred.
The updated rules might be better but there is no evidence that they are a panacea. If they were they wouldn’t need constant updating.