Department of Finance dismisses ‘fiscal space’ discrepancy claims

Irish Fiscal Advisory Council’s stance differs from that of Michael Noonan as assessment of funds available for tax cuts and spending increases becomes key political battleground

Minister for Finance Michael Noonan has been saying that the next government might have as much as €12 billion in the course of the next five years. In recent days, however, claims by the IFAC that only €3.2 billion might be available have been seized on by the opposition.

Minister for Finance Michael Noonan has been saying that the next government might have as much as €12 billion in the course of the next five years. In recent days, however, claims by the IFAC that only €3.2 billion might be available have been seized on by the opposition.

 

The Department of Finance has dismissed claims of a big discrepancy between its assessment of the funds available for tax cuts and spending increases in coming years and those of the Irish Fiscal Advisory Council.

With the election imminent, political conflict over the amount of “fiscal space” available to the next administration emerging as an early battleground.

Minister for Finance Michael Noonan has been saying that the next government might have as much as €12 billion in the course of the next five years. In recent days, however, claims by the IFAC that only €3.2 billion might be available have been seized on by the opposition.

The department issued an information note this evening on the differences between its figures and those of the IFAC, the State’s budget watchdog.

The calculation of “fiscal space” is crucial politically as it reflects the amount of resources available for new tax and spending measures once domestic and European fiscal rules are complied with in any given year.

“The difference between the department’s figures and those of the IFAC reflects the fact that their estimates assume that various forms of social benefits (unemployment benefits, old age pension, child benefit payments, etc.) are indexed to the rate of inflation,” said the department.

“Their numbers are also based on the assumption of public sector pay increases beyond 2018.

“Any such increases in expenditure are a matter for the Government of the day and require a policy decision as part of the annual budgetary cycle. To include these measures in the fiscal space by the Department of Finance would be an assumption on future policy decisions, which are a matter for the next government.”

Estimates

The department estimates the total amount of “gross fiscal space” available between 2017 and 2021 is €10.9 billion, a figure that includes a technical assumption that income tax system is indexed with inflation.

The calculation for “net fiscal space” in the same period is €8.6 billion, a figure which reflects a €2.3 billion allocation for spending on the ageing population, capital investment and public pay increases under the Lansdowne Road deal.

Prof John McHale, chairman of the the IFAC, has said the department’s figures did not take into account the cost of “standing still” by adjusting spending programmes and the tax system for inflation.

In its note, however, the department said it reports figures for “fiscal space” in nominal terms only, with no automatic indexation of public expenditure to inflation “as there has been no Government decision to this effect” .

At the same time, the department said additional resources would become available if the tax system was not indexed or if the EU authorities eased Ireland’s budget targets.

According to the note, non-indexation of the tax system would deliver another €2 billion in “fiscal space”. Such a move, however, would erode the benefit in rteal of previous steps to cut tax.

Leeway

On EU targets, the department said officials have estimated that further sum of about €1.5 billion could become available if the Brussels authorities grant some budgetary leeway to Dublin.

Ireland’s current “medium -term objective” is to achieve a balanced budget in structural terms, a development which would allow the authorities a little more scope to cut tax or boost spending.

However, the department said a “slightly less stringent” target might be set by the European Commission.

“Officials in the Department of Finance have estimated that a structural deficit of -0.5 per cent of gross domestic product (rather than the current 0.0 per cent of GDP) is more likely, but this is subject to the outcome of the technical discussions,” the note said.

Such a change would mean Ireland could achieve its medium-term objective by 2018, one year earlier than the 2019 deadline set out in the October budget for achievement of the current target.