Interpretation in fiscal space

The suspension of belief is commonly needed for science fiction.  Most space dramas require alien races to speak English or the existence of some form of instantaneous universal translator.  It now seems that something similar is required when moving in fiscal space.  Fiscal space is the money available for new measures while achieving minimum compliance with the rules.   Lots of words are being used to describe this but can we tell what they actually mean?

On Monday, the European Commission issued their Country-Specific Recommendations as part of the European Semester.  Here are some extracts from Ireland’s CSRs covering fiscal outcomes:

On 12 July 2016, the Council recommended Ireland to achieve an annual fiscal adjustment of 0.6% of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of a significant deviation from the recommended fiscal adjustment over 2016 and 2017 taken together.

According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure which does not exceed 2.4% in 2018. It would correspond to an annual structural adjustment of 0.6 % of GDP. The expenditure benchmark reflects an adjustment to correct for a distortion to the 10-year reference rate of potential growth caused by the exceptionally high surge in real GDP growth in 2015. Following the approach taken by the Irish authorities in their Budget 2017 calculations, the Commission has taken the average of potential growth rates in 2014 and 2016. Under unchanged policies, there is a risk of some deviation from the requirement over 2017 and 2018 taken together. At the same time, Ireland is forecast to comply with the transitional debt rule in 2017 and 2018. Overall, the Council is of the opinion that further measures will be needed, notably in 2017, to comply with the provisions of the Stability and Growth Pact. In view of Ireland’s current cyclical conditions and the heightened external risks, the use of any windfall gains to further reduce the general government debt ratio would be prudent. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in light of the cyclical conditions. As recalled in the Commission Communication accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal to achieve a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Ireland’s public finances. In that context, the Commission intends to make use of the applicable margin of appreciation in light of the cyclical situation of Ireland.

5 thoughts on “Interpretation in fiscal space”

  1. The Col du Tourmalet is ontologically real. It exists. Sean Kelly has empirically proved it by riding it.

    The Stability & Growth Pact is arbitrary macroeconomic fiction designed to protect the EU’s largest power as it free-rides its unfair exchange rated bike on false accounting and, more importantly, its financial system and to make it impossible for weaker states subjected to austerity to catch up in terms of productivity etc

    Albeit macroeconomic fiction its effects are real and extremely damaging to states weaker than Germany.

    Worse, it has been forced into law.

    So, we now have economic professors, such as your good self, now spending time gathering generally realistic estimates so as to evaluate state policy based on … well … nonsense. You have my sympathy …..

    … but it would be more honest and ethical to simply come out and state unequivocally that as reasonably educated academics that you simply cannot put up with such nonsense. Then you would have my respect.

    This state’s Citizenry needs, badly needs, investment.

    Such needs demands that this nonsense must end.

  2. To keep it simple, how about calculating output gap by just subtracting the unemployment rate from the long-term average.

    The data on everything else is problematic.

  3. The “margin of appreciation” might suitably be described as the Moscovici/Macron factor. The fundamental point is that countries cannot be coerced into following the correct budgetary policies. The forces of domestic politics are too strong. The only realistic objective for the Commission is to exercise an element of restraint. Burying the process in a sea of technical mumbo jumbo that only economists, or, at least those trained in macro-economics, can understand, does not help. But it was the member states that designed the process. With certain ulterior motives in mind!

  4. Seems I can’t get more than a one sentence comment on here…hey ho…most poster bar me…

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