The Fiscal Council published its Ex-Post Assessment of Compliance with the Domestic Budgetary Rule in 2016. The assessment is summarised in this table:
The budget condition for 2016 was a structural balance of 0.0 per cent of GDP which was not achieved in 2016 as the structural balance was -1.7 per cent of GDP.
The adjustment path condition required an improvement of 0.6 percentage points of GDP in the structural balance. This was not achieved as the improvement was 0.3 percentage points of GDP.
The expenditure benchmark is designed to give the real change for an adjusted measure of government expenditure (net of discretionary revenue measures) that corresponds to the required change in the structural balance. Discretionary revenue measures (including non-indexation of the tax system) amounted to -€0.7 billion in 2016. The assessment is that Ireland was in compliance with the expenditure benchmark in 2016.
This contradiction between failing to achieve the required improvement in the structural balance yet complying with the expenditure benchmark is largely explained by a one-off transaction relating to AIB preference shares that took place in 2015. As the AIB transaction was not repeated in 2016, the €2.1 billion from that transaction could be replaced with other government spending without breaching the expenditure benchmark. The outturns show that around half of the €2.1 billion “space” was used for expenditure in 2016 (which will continue in subsequent years).
If this one-off item is excluded from the 2016 assessment of the expenditure benchmark then it would have been breached by 0.4 per cent of GDP. The breach net of one-offs roughly corresponds to the shortfall in the required improvement in the structural balance (0.3 percentage points of GDP) which does take one-off items into account.
Under the 2012 Fiscal Responsibility Act the Fiscal Council is required to assess the fiscal stance using the structural primary balance. That is, the general government balance excluding interest costs and one-off items and adjusted for the cyclical position of the economy.
The primary balance itself is relatively straightforward to measure and the figures from the CSO show it to have been +0.7 per cent of GDP in 2015 and +1.7 per cent of GDP in 2016.
To get the underlying changes the impact of one-off items must be removed. The Fiscal Council assesses that there were three such items in 2015 and 2016. These were the AIB transaction in 2015, while in 2016 there was the return to Ireland of a pre-paid margin related to borrowing from the EFSF and part of the EU contribution assessed to Ireland that will be non-recurring. Accounting for these, the table above shows that the primary balance net of one-offs showed close to no change in 2016 – it improved by 0.1 percentage points of GDP.
The structural primary balance depends on the cyclical position of the economy, that is the difference between the actual and potential growth rates of the economy. The measurement and estimation involved in this are significant. The CSO put the real GDP growth rate for 2016 at 5.2 per cent while the potential real GDP growth rate estimated using the method set out by the European Commission is 5.1 per cent.
These closeness of these numbers implies that the impact of the business cycle on the government balance in 2016 was relatively small. The change in the primary balance net of one-offs and the change in the structural primary balance are pretty much the same. The structural primary balance is estimated to have been unchanged in 2016 which would correspond to a “neutral” fiscal stance.
Your views on the fiscal stance will depend on how appropriate you think the 5.2/5.1 figures are as indicators of the real/potential growth rates of the economy in 2016. Was the Irish economy growing above its potential in 2016? What is the appropriate fiscal stance given the cyclical position of the economy? The Fiscal Council will assess these and other issues in its forthcoming Fiscal Assessment Report which is set to be published next week.