Archive for the ‘Fiscal Policy’ Category

Stability Programme Update


Tuesday, April 15th, 2014

A DoF presentation with some of the key forecasts in the SPU is available here. There is also a press release.

The full text is here.

Government Finance Statistics


Monday, April 14th, 2014

The CSO have published the end-2013 update of these series:

There isn’t much to surprise in the figures.  Gross debt at the end of 2013 was €203 billion (124 per cent of GDP).  Once offsetting assets of €42 billion in the same categories are accounted for net debt was €161 billion.  The assets were:

  • Cash: €23.8 billion
  • Bonds: €10.8 billion
  • Loans: €7.1 billion

Other assets not used in the net debt calculation are include shares and other equity of €29.8 billion and other financial assets (mainly accounts receivable) of €9.2 billion.

The market value of Ireland’s €203 billion of nominal debt instruments was €219 billion at the end of the year.  The estimated pension liabilities of the government are put at €98 billion, while contingent liabilities are “just” €73 billion.

The 2013 general government deficit is provisionally estimated to have been €11.8 billion (7.2 per cent of GDP) from €13.4 billion in 2012.

The ‘operating balance’ of the government sector went from a deficit of €12.5 billion in 2012 to one of €11.8 billion in 2013, an improvement of just €0.7 billion.  The improvement in the overall deficit was greater because of changes in the capital budget.

Gross fixed capital formation was further reduced from €3.1 billion in 2012 to €2.7 billion in 2013.  With consumption of fixed capital at €2.3 billion the increase in the public capital stock was just €0.4 billion.  The main change in the capital account was a €0.7 billion gain in the ‘net acquisition of unproduced assets’ which likely relates to things such as mobile phone and lottery licenses.

Revenue from taxes and social contributions rose from €49.1 billion to €51.6 billion, while investment income was up around €0.5 billion to €2.7 billion. Much of these increases were offset by an increase in interest expenditure of €1.5 billion to €7.4 billion.  Social transfers paid decreased from €29.0 billion to €28.6 billion, of which €24.0 billion were in cash.

Corporation Tax: Effective Tax Rates


Tuesday, April 8th, 2014

The table below has eight different answers that are used to address the question of the effective rate of corporate income tax in Ireland.  Some of the details behind each approach are in this DoF Technical Paper (done jointly with Kate Levey) with #3 and #5 judged best for gauging the effective tax rate on the aggregate total of corporate profits in Ireland.


But, of course, the choice is yours.

On a related matter the Tax Strategy Group papers for Budget 2014 were released last week including one, albeit somewhat redacted, on Corporation Tax Policy.

Abolish Income Tax


Monday, March 24th, 2014

… and use USC instead. Reported by The Irish Times here.  The full text of Tom Healy’s address is here.

IGEES launches new website


Thursday, February 13th, 2014

The Irish Government Economic and Evaluation Service has launched its new website at

Irish Economic Policy Conference 2014: Economic Policy after the Bailout


Tuesday, January 14th, 2014

Organised jointly by the ESRI, Dublin Economic Workshop, UL, and UCD’s Geary Institute, this year’s policy conference (see previous years here and here) will be on the theme of economic policy after the bailout. This conference brings policy makers, politicians, civil servants and academics together to address this question of national importance. The venue will be the Institute of Bankers in the IFSC. (Click here for a map).

Date: 31st January 2013

Venue: Institute of Bankers, IFSC


9:15 – 10:45: Plenary: The Impact of the Crisis on Industrial Relations

Chair: Aedín Doris (NUI Maynooth)

  • Kieran Mulvey (Labour Relations Commission) Prospects for Pay and Industrial Relations in the Irish Economy
  • Shay Cody (IMPACT Trade Union) “The impact of the crisis on industrial relations – a public service focus”
  • Michelle O’Sullivan/Tom Turner (University of Limerick) “The Crisis and Implications for Precarious Employment’”

10.45-11.15: Coffee Break

11:15 – 12:45: 2A. Migration and the Labour Market

Chair: Philip O’Connell (UCD Geary Institute)

  • Piaras MacÉinrí (UCC) ‘Beyond the choice v constraint debate: some key findings from a recent representative survey on emigration’
  • Peter Muhlau (TCD) “Social ties and the labour market integration of Polish migrants in Ireland and Germany”
  • Alan Barrett (ESRI & TCD) and Irene Mosca (TCD) “The impact of an adult child’s emigration on the mental health of an older parent”

2B. Economics: Teaching and Practice

Chair: Ronan Gallagher (Dept of Public Expenditure and Reform)

  • Brian Lucey (TCD): “Finance Education Before and After the Crash”
  • Liam Delaney (Stirling): “Graduate Economics Education”
  • Jeffrey Egan (McGraw-Hill Education) “The commercial interest in Third Level Education”

12:45 – 1:45: Lunch Break

1:45 – 3:15: 3A. Health and Recovery

Chair: Alex White, TD, Minister of State

  • David Madden (UCD) “Health and Wealth on the Roller-Coaster: Ireland 2003-2011”
  • Charles Normand TCD) and Anne Nolan (TCD & ESRI) “The impact of the economic crisis on health and the health system in Ireland”
  • Paul Gorecki (ESRI) ‘Pricing Pharmaceuticals: Has Public Policy Delivered?”

3B. Fiscal Policy

Chair: Stephen Donnelly TD

  • Seamus Coffey (UCC) “The continuing constraints on Irish fiscal policy”
  • Diarmuid Smyth (IFAC) ‘IFAC: Formative years and the future’
  • Rory O’Farrell, (NERI) “Supplying solutions in demanding times: the effects of various fiscal measures”

3:15 – 3:30: Coffee Break

3:30 – 5:00: Plenary: Debt, Default and Banking System Design

Chair: Fiona Muldoon (Central Bank of Ireland)

  • Gregory Connor (NUI Maynooth) “An Economist’s Perspective on the Quality of Irish Bank Assets”
  • Kieran McQuinn and Yvonne McCarthy (Central Bank of Ireland) “Credit conditions in a boom and bust property market”
  • Colm McCarthy “Designing a Banking System for Economic Recovery”
  • Ronan Lyons (TCD) “Household expectations and the housing market: from bust to boom???”

This conference receives no funding, so we have to charge to cover expenses like room hire, tea and coffee. The registration fee is €20, but free for students. Please click here or on the link below to pay the fee, then register by attaching your payment confirmation to an e-mail with your name and affiliation to [Block bookings can be made by purchasing the required number of registrations and then sending the list of names to]

Please click here to pay the registration fee.

Full-Year Exchequer Statement


Friday, January 3rd, 2014

December 2013 Exchequer Statement

Related Documents

Domestic demand in historical context


Thursday, December 19th, 2013

Today’s CSO readings are good news and should be seen in their recent historical context.

News headlines are pointing to the ‘domestic’ part of the economy experiencing an uptick. Let’s look at final domestic demand as one measure of this. The two figures below bear this out, with the latest data coloured in red, and the series indexed to 2008 Q1, the peak of final domestic demand. The first plots out the movement from 2002 until 2013 Q3, the second from 2010.

The clear uptick can be seen, but the economy is obviously still fragile and the uptick, in the context of a rather demand-depressed economy, shouldn’t be overstated.

Nick Crafts on debt and the ECB


Friday, December 13th, 2013


Fiscal Assessment Report


Friday, November 22nd, 2013

The latest report from the FAC is available here.

Italy eyes ‘Google Tax’ to help fix public finances


Tuesday, November 5th, 2013

Using standard provisions in tax codes internet companies face low or no corporation tax bills in the countries of their customers.  This issue has been repeatedly raised in the UK by Margaret Hodge, chair of the Westminster Public Accounts Committee.  In relation to Google in particular much of the focus has been on whether Google has a permanent establishment in the UK.

This issue is also agitating the chair of the Italian lower house Budget Committee, Francesco Boccia, who has drafted a bill to try and force companies like Google to engage with their customers in Italy through a party that has a permanent establishment in Italy.  See this report from Reuters.

The proposal would not tax the multinationals directly but would force them to use Italian companies to place their advertisements, rather than doing so through third parties based in low-tax countries like Luxembourg, Ireland or outside the European Union.

Doubts about the feasibility of such a proposal seem justified but it does show someone trying to take some action on this issue.

EC: Summer 2013 Programme Review


Tuesday, October 29th, 2013

The Staff Report on the Commission’s latest review of Ireland’s EU/IMF programme is now available.  It does not contain much that is new.  There is this on page 20.

Ireland’s fiscal stance has not been overtly pro-cyclical since the beginning of the crisis. Using conventional metrics, discretionary fiscal policy has been clearly leaning against the wind in 2008 and 2009, and did not move openly or blatantly into the wind in 2010 and after, in spite of the significant budgetary adjustment efforts put in place by the Irish government (Graph 2.1) (14). Fiscal policy remained, and is expected to remain broadly in line with the stabilisation function of discretionary fiscal policy, or at least not to run counter that function. In the early years (2008-2009) when fiscal policy was incontrovertibly counter-cyclical, the fiscal policy strategy mainly consisted of correcting previous policy commitments built on optimistic growth projections accompanied by the fact that in a deflationary environment, nominal expenditure freezes implied increases in real terms. Since 2011, the improvement of the structural deficit has taken place in an environment of slightly improving economic conditions.

This is Graph 2.1. Click here to enlarge.

Maybe footnote 14 is important:

(14) The structural changes of the economy during the economic crisis are beyond normal business cycle fluctuations. Therefore, potential growth and structural government balance estimates need to be treated with caution.

Corporate Tax Collection


Tuesday, October 29th, 2013

Representatives of the UK’s Revenue and Customs appeared yesterday before the Public Accounts Committee of the Houses of Parliament.  The exchanges were interesting though the evidence from the HMRC officials was sometimes confusing.  Following on from previous work done by the committee much of the focus was on corporation tax with issues relating to tax residency, tax compliance, the tax gap and permanent establishment among those referred to.

The questioning from the committee chair, Margaret Hodge, was forthright but at times slipped into grandstanding, primarily a suggestion that the Revenue show take “a few show cases”.  Ms Hodge also wanted the Revenue to estimate how much the tax gap would be if it was calculated “between the money that you collect and the money if everyone paid their fair share”.  Of course, “fair share” is an alien concept to tax collectors; their job is to collect what the tax code prescribes. Unless something illegal is being undertaken the answer to such a question in relation to MNCs will be close to zero.   If the UK wishes to collect more corporation tax Parliament changing the tax laws would be more effective than the Revenue undertaking some show cases.

An investigation into Google’s activities was alluded to through an exploration of documents provided by a former employee but it is not clear that it will lead to a change in the judgement that Google does not have a permanent establishment in the UK.

I don’t know if the Houses of Parliament make transcripts of the committee sessions available.  The transcript of a recent appearance by our Revenue Commissioners at a sub-committee of the Oireachtas Finance Committee is available here.

A Bloomberg feature on some elements of the Irish corporation tax regime was also published yesterday.

UPDATE: A transcript of yesterday’s Commons PAC hearing is here (H/T Gavin).

Private debt, public debt, and crises


Wednesday, October 23rd, 2013

Òscar Jordà, Moritz Schularick, Alan Taylor have a new piece on the issue, available here.

Google’s Tax Planning


Friday, October 11th, 2013

The Dutch Sandwich and Double Irish figure prominently in this FT article about Google’s tax returns for 2012.
It seems that Google Netherlands Holdings, which represents the Dutch part of the sandwich, received €8.6bn in royalties from Google Ireland Ltd last year.

House prices: bubbles versus booms


Tuesday, October 1st, 2013

The end of one quarter and the start of another sees the usual slew of economic reports and the start of Q4 is no exception. Today sees the launch of the Q3 Report. In line with other reports in the last week or so, and indeed with the last few Reports, there is evidence of strong price rises in certain Dublin segments. What is new this quarter is the clarity of the divide between Dublin and elsewhere: all six Dublin regions analysed show year-on-year gains in asking prices (from 1.4% in North County Dublin to 12.7% in South County Dublin), while every other region analysed (29 in total) continues to show year-on-year falls (from 3.1% in Galway city to 19.5% in Laois).

The substantial increases in South Dublin over the last 12 months have led to talk of “yet another bubble” emerging, with internet forums awash with sentiment such as “Not again!” and “Will we never learn?”. To me, this is largely misplaced, mistaking a house price boom for a house price bubble. Let me explain.

Firstly, I should state that, unlike “recession” which is taken to mean two consecutive quarters of negative growth, there is no agreement among economists on what exactly constitutes a bubble, in house prices or in other assets, but the general rule is that prices have to detach from “fundamentals”. For example, the Congressional Budget Office defines an asset bubble as an economic development where the price of an asset class “rises to a level that appears to be unsustainable and well above the assets’ value as determined by economic fundamentals”. Charles Kindleberger wrote the book on bubbles and his take on it is that almost always credit is at the heart of bubbles: it’s hard for prices to detach from fundamentals if people only have their current income to squander. If you give them access to their future income also, through credit, that’s when prices can really detach.


The boom, not the slump, is the right time for austerity


Saturday, July 20th, 2013

Alan Taylor has a piece on Vox today that is a nice contribution to the debate on the output effects of austerity. That debate has largely been about the endogeneity of fiscal policy: the more you take this into account, the more contractionary austerity becomes. He and Oscar Jorda show that if you give less weight to episodes where the austerity/no austerity policy choice was more predictable (i.e. more endogenous) and more weight to episodes where the policy choice was less predictable (i.e. more exogenous) then you find that austerity was extremely contractionary in slumps. This does not mean that fiscal consolidation is never necessary, but that the time for consolidation is when times are good, not when times are bad. It would be nice if Austerians could display a similar recognition that context matters.

Successful Completion of Tenth Review of Troika Programme


Friday, May 10th, 2013

In a statement issued at the end of this Review yesterday, we were given the by-now familiar plaudits for achieving various benchmarks. Going forward, ‘strict implementation’ of this year’s budgetary targets is urged.

The gravity of the unemployment situation is acknowledged. ‘Swift action needed to deal with unemployment’ the newspaper headlines proclaimed. The onus for this is placed on the Irish government and a familiar list of policies proposed, including for example ‘the need for enhanced engagement with the unemployed and the opening up of competition in sheltered sectors like legal services’.

I wonder how much our readers think increased competition between lawyers will contribute to lowering our unemployment rate.

Taxation Trends in the EU


Monday, April 29th, 2013

Eurostat have published a news release with some summary tables of taxation trends in the EU.  The data are taken from the 2013 Statistical Book on the same topic.  The section on Ireland in the book opens with the following summary.

At 28.9 % in 2011, the total tax-to-GDP ratio in Ireland is the sixth lowest in the Union and the second lowest in the euro area. In recent years this ratio gradually decreased from a 2006 high of 32.1 %, but has increased again in 2011, apparently on foot of budgetary measures aimed at raising tax receipts.

The taxation structure is characterised by a strong reliance on taxes rather than social contributions. Direct and indirect taxation make up 43.4 % and 39.4 % of the total revenue in 2011 respectively, whereas the social contributions raise only 17.2 % of total tax revenue. The share of social contributions is the second lowest in the EU. The structure of taxation differs considerably from the typical structure of the EU-27, where each item contributes roughly a third of the total. As in the majority of Member States, the largest share of indirect taxes is constituted by VAT receipts, which provide 54.1 % of total indirect taxes (53.3 % for the EU-27). The structure of direct taxation is similar to that found in the EU-27. The shares of personal income taxes and corporate income taxes are in line with the EU-27 average and represent 9.2 % and 2.4 % of GDP. Social contributions represent a meagre 5 % of GDP (second lowest in the Union after Denmark), compared to an EU-27 average of 12.7 %. Employers’ and employees’ contributions are at 3.5 % and 1.3 % of GDP, respectively.

Ireland is one of the most fiscally centralised countries in Europe; local government has only low revenues (3.5 % of tax revenues). The social security fund receives just 16.4 % of tax revenues (EU-27 37.3%), while the vast majority (79.2 %) of tax revenue accrues to central government. This ratio is exceeded only by Malta and the UK.

FAC Report


Wednesday, April 10th, 2013

The latest Assessment Report from the Fiscal Advisory Council can be accessed here.

‘Panic Driven Austerity’


Friday, March 1st, 2013

Paul de Grauwe and Yuemei Ji have an interesting commentary on the causes and effects of austerity here.

Economic Assessment of the Euro Area


Wednesday, February 20th, 2013

On behalf of the EUROFRAME group of research institutes, the ESRI today published a report entitled “Economic Assessment of the Euro Area”.

Among the findings contained in the report are the following:

·         As a result of relatively weak external demand, continuing financial uncertainty and the contractionary stance of fiscal policy, output fell in the Euro Area in 2012 (-0.5 per cent). Over the course of 2012 there was a slowdown in some key economies, which were previously contributing much of the growth. This slowdown has carryover effects into 2013.

·         Even though we anticipate a recovery in confidence in some major economies over the course of this year, the outcome for the Euro Area as a whole is still likely to be a further limited fall in GDP in 2013 of 0.3 per cent. Weak external demand will not be enough to compensate for the fall in domestic demand.

·         For 2014, a recovery in domestic demand should see a return to significant growth in GDP of around 1.3 per cent. However, this forecast must be considered in the light of the continuing vulnerability to financial shocks of a number of the Euro Area member states.

·         This vulnerability of countries in financial distress is being addressed through a continuing major fiscal adjustment. However, the fiscal adjustment under way across other members of the Area is also having a substantial negative effect on growth, particularly in the crisis countries. Without this fiscal adjustment the Euro Area would be looking to growth this year at around 1½ per cent and next year at approximately 2 per cent.

ESRI QEC Research Notes


Tuesday, February 5th, 2013

Last week the latest ESRI Quarterly Economic Commentary was published. It includes 5 research notes including one by myself on the regional dimension of the unemployment crisis.

While there is a lot of discussion about unemployment, the differences across regions have not received much attention. The note shows that the differences are significant. It also shows that things would look a lot worse if it had not been for a drop in labour force participation – in the Border region the unemployment rate could have reached 27%. Not surprisingly a sharp drop in employment is the major cause of the increase in unemployment, but a look at the sectoral breakdown of employment changes gives some interesting results. Firstly, construction employment appears to have contracted quite uniformly across the country. Secondly, employment in education and health actually grew. Thirdly, there are some interesting differences across the regions with respect to other sectors. For example, manufacturing declined much more in Dublin than elsewhere. Most importantly the analysis suggests that the underlying factors that are responsible for the differences in unemployment rates across the regions are very persistent but were hidden during the boom. You can expect some more analysis on this in the near future.

The other notes are:
Tax and Taxable Capacity: Ireland in Comparative Perspective
Comparing Public and Private Sector Pay in Ireland: Size Matters
Trends in Consumption since the Crisis
Revisions to Population, Migration and the Labour Force, 2007-2011

Benchmarking the US and UK economies post-2007


Wednesday, October 24th, 2012
What is it with these economic historians? Schularick and Taylor cast a dim eye on UK economic performance here.
HT Paul Krugman.

In which Barry Eichengreen and I are shocked


Tuesday, October 23rd, 2012


ESRI Geary Lecture…and Seminar by Tim Besley


Wednesday, October 10th, 2012

Further information on Geary Lecture and seminar by Tim Besley below. To reserve a place at either/both event(s) please email and state clearly which event(s) you wish to attend.

Geary Lecture: Tim Besley

4pm Friday 19 October at ESRI

Making and Breaking Tax Systems: The Institutional Foundations of Fiscal Capacity

We have become accustomed to governments having the fiscal capacity to support revenue raising of more than 40% of GDP.  But such levels of taxation were unheard of before the 20th century.  This lecture will review some of the trends in taxation over the past one hundred years and how the tax systems were created which support the needs of modern governments.  It will use this historical perspective to reflect on the challenges that need to be confronted in trying to build a centralized fiscal state in Europe.    

Research Seminar, 1pm Friday 19 October, at ESRI

The Welfare Cost of Lawlessness: Evidence from Somali Piracy

This paper estimates the effect of piracy attacks on shipping costs using a unique data set on shipping contracts in the dry bulk market. We look at shipping routes whose shortest path exposes them to piracy attacks and find that the increase in attacks in 2008 lead to around a eight to twelve percent increase in shipping costs. We use this estimate to get a sense of the welfare loss imposed by piracy. Depending on what is included, we estimate that generating around 120 USD million of revenue for pirates in the Somalia area led to a welfare loss of anywhere between 0.9 and 3.3 USD billion.  Even at the lower bound, therefore, piracy is an expensive way of making transfers.

ESRI Geary Lecture – Tim Besley, LSE


Wednesday, October 3rd, 2012

This year’s Geary Lecture will be delivered by Tim Besley, Professor of Economics and Political Science, LSE. He will speak on

“Making and Breaking Tax Systems: Institutional Foundations of the Fiscal State”

Date: Friday 19th October

Time: 4pm

Venue: ESRI, Sir John Rogerson’s Quay

Attendance at the event is free but must be pre-booked. There are a limited number of places available and early booking is encouraged. To book a place, please send details of attendee’s name, organisation and contact telephone number by email to



Tuesday, September 4th, 2012

We have a narrow definition of whingeing in this country, it appears.

You might think that someone who represents a rich constituency complaining about value-based property taxes “punishing people for their address” could be fairly described as whingeing. Indeed, you might think that such a person should be reminded that “The country’s in crisis. We can’t put our fingers to our ears and pretend it’s not happening”.

Apparently not. Whingeing, it seems, is a concept that only applies to people complaining about cuts to the public services on which poor people rely, not to people complaining about higher taxes on people in expensive neighbourhoods.

The possible shape of a second bailout for Ireland


Tuesday, June 12th, 2012 discussed in the Irish Times today by my UL colleague Donal Donovan. From the piece:

The prospects for Ireland being able to access sufficient market funding by late 2013 do not appear favourable. The lending environment for sovereigns in much of the euro zone has worsened steadily and, barring miracles in Greece and Spain, is unlikely to improve sharply soon. Notwithstanding Ireland’s Yes vote and continued adherence to the troika programme, we can’t avoid being affected by the general market nervousness. Ireland’s budget deficit, at 8-9 per cent of gross domestic product, remains the highest among debt-distressed euro zone members.

Even under favourable assumptions, without specific debt-alleviation measures, the debt to GDP ratio will be over 100 per cent – second only to Greece – for some time.

Despite encouraging words from European Central Bank president Mario Draghi, it is hard to be confident that the estimated €40 billion needed to cover the budget deficit and repay maturing debt obligations in 2014-2015 can be obtained at affordable market terms.

Complying with the Debt Reduction Rule


Friday, May 4th, 2012

The issue of whether the Fiscal Compact will mean additional austerity in the post-2015 period has generated some heat in the referendum debate.  John has usefully provided some light to this issue in a previous post.  This post adds little to the conclusions there on the “1/20th” rule but relays a similar point in a slightly different way.  Based on IMF projections Ireland will satisfy the debt reduction rule in 2015.

The debt reduction benchmark is calculated as an average over a three-year period.  One of two averages can be used to satisfy the rule.  There is a backward-looking average covering the years t-1, t-2 and t-3 with a benchmark calculated for year t, and there is also a partially-forward-looking average for the years t-1, t and t+1 with a benchmark calculated for year t+2.

The formula for the benchmark is in the Code of Conduct for the Stability and Growth Pact and for the retrospective average it can be seen on page 8 to be:

where bb is the benchmark or target debt ratio and b is the debt-to-GDP ratio in other years.  Although there is a bit to the formula all that is needed is the debt ratios for three years in order to calculate the benchmark for the next year. 

If the debt ratio for the current year is expected to be below the benchmark level given by the formula then the conditions of the debt reduction rule are satisfied.

To simulate the impact of the rule on Ireland we can use the IMF’s forecasts of the general government gross debt from the recent update of the World Economic Outlook as these extend out to 2017.  We will use these to gauge Ireland’s performance to the rule beginning in 2012.

The debt ratio column are actual data up to 2010 and are the IMF’s projections from 2011 to 2017.  The benchmark column are the targets for each year and is calculated by putting the debt ratios for the preceding three years into the formula shown above.   Compliance is true if the debt ratio for any year is less than the benchmark calculated for that year.  Under current assumptions and IMF projections Ireland will satisfy the retrospective version of the debt reduction rule in 2017.

One of the assumptions the IMF makes is that we undertake the €8.6 billion of fiscal adjustment planned for 2013-15.  Projections after that are based on a “no policy change” scenario.  Under IMF projections we will satisfy the debt brake rule in 2017 with no additional fiscal effort above what has already been provided for up to 2015 with neutral budgets after that.

The debt reduction rule can be satisfied while running deficits and does not require any debt repayments.  The IMF project that there will be an overall budget deficit of 1.9% of GDP in 2017. 

The gross debt continues to rise and in the years from 2014 to 2017 (the years used in the 2017 comparison) the gross debt increases from €201.0 billion in 2014 to €213.5 billion in 2017. 

If the alternative forward-looking version of the rule was applied it would actually show that we would be in compliance with the rule from 2015, as the benchmark calculation is based on the debt ratios in the same three years, 2014, 2015 and 2016 and again compared to the ratio in 2017.  Using the forward looking version of the rule in 2015 will also give a benchmark of 109.6% of GDP for 2017 which is, of course, above the projected debt ratio for 2017.

Although this is only a simulation it does show that we would not need additional fiscal adjustment to satisfy the debt brake rule.  In fact, using IMF projections it can be shown that we will be able to satisfy the rule before we even leave the Excessive Deficit Procedure (EDP).  The debt brake rule doesn’t actually become effective until three years after a country leaves the EDP.  We have until 2018 to become compliant with the debt reduction rule but we may actually be compliant by as early as 2015.

One reason for this is that the “1/20th” rule is actually relatively benign and according to Karl Whelan in section 2.1 of this paper the “rate of progress that is deemed satisfactory is still very slow.”  We have plenty to be worrying about but satisfying the conditions of the debt brake is not one of them.  In fact, it is likely that we will want to reduce the debt ratio at a rate faster than that required by the rule.