Government to get leeway to cut tax as Brussels eases targets

The next government may have more scope to cut tax or boost spending in the medium-term, after moves in Brussels to ease one of Ireland’s key fiscal targets.

Weeks ahead of the general election, the development means the administration that succeeds the current Fine Gael-Labour coalition will have more money to spend, provided it makes further progress to repair the public finances.

The change, confirmed by an informed source, follows a review by the European Commission. The move has not yet been made public but it has been endorsed by a committee of EU member states.

Assuming the new fiscal target is reached in the coming years, the move could provide leeway to bring forward some big capital projects.

Ireland’s previous fiscal target allowed scope to boost the budget by €8.8 billion between 2016 and 2020, with the biggest rises foreseen in 2019 and 2020. The easing of the target, now set to get the green light, could give the next government flexibility to boost the budget by €10 billion in the same five years. However, the biggest increases would still come only towards the end of the period.

The target in question centres on the structural deficit in the public finances, an estimate of the permanent deficit, net of cyclical and temporary measures.

Structural deficit

Under new rules attention shifts to the structural deficit once Ireland’s headline deficit – which came in about 1.5 per cent of gross domestic product last year – drops below 3 per cent of GDP, the official EU limit.

The previous target obliged Ireland to meet a “medium-term objective” of a balanced budget in structural terms by 2019.

This has now been relaxed. Instead of balancing the books in structural terms, the new “medium-term objective” allows the State to run a structural deficit of 0.5 per cent of GDP.

Under national and EU rules, governments have more scope to expand their budgets whenever their “medium-term objectives” are realised.

The easing of Ireland’s target means the next government will have a shorter fiscal distance to travel before meeting the objective, bringing forward the point at which bigger moves on tax or expenditure are permitted.

The emphasis on the structural deficit marks an effort to concentrate on the underlying state of the public finances by stripping out the effects of the economic cycle and once-off factors. As the structural deficit is cannot be strictly observed in fiscal data, it is calculated by economists according to technical estimates.

Budget forecast

Documents released with the October budget forecast a structural deficit of 2.5 per cent of GDP this year, 1.4 per cent next year and 0.3 per cent in 2018. Under these projections, the public finances would not reach balance in structural terms until 2019.

Ireland’s fiscal position has improved since then, however. This has led Minister for Finance Michael Noonan to predict a balanced budget in headline terms in 2017, one year earlier than foreseen previously.

Even if the headline deficit is eliminated at that point, there would still be a structural deficit.