Irish Water: Eurostat ruling represents major political setback

The Coalition is insisting that the ruling will make little difference to its budgetary plans

Eurostat’s ruling on Irish Water may prove to be more material in the political rather than the economic sense, but it still marks a big setback for the Government.

The Coalition insists the ruling will not blow its fiscal plan for 2016 off course. Moreover, it argues there will be no change in projections out to 2020. For as long as the economy grows, the upfront budgetary impact will be pretty limited.

If growth suddenly stalled, however, the liabilities of Irish Water would constitute one more vulnerability among many on the State’s balance sheet. And if all goes to plan, the public finances would still be a little slower to reach balance.

All of this turns on the accounting treatment of Irish Water’s affairs. With the public finances under acute strain after the crash, the Coalition sought to lessen the burden of the new regime by taking the utility’s liabilities off-balance sheet. At a time of sky-high budget deficits and rapidly rising national debt, the aim was to remove Irish Water from the equation.

READ MORE

As new charges and a large investment programme were introduced and tangible benefits would be realised in the form of lower deficit and debt levels. Or so ran the argument. This was seen as a key consideration, given Ireland’s lack of access to the international debt markets, which frown on high deficits and debt.

Following Eurostat’s ruling, however, Irish Water’s liabilities must be carried on the State’s balance sheet. The country’s deficit and debt levels will now be a little higher than foreseen, though not hugely. The return of growth and steadily improving public finances mean these key metrics are no longer at the stratospheric levels reached after the crash.

Still, official figures suggest the national debt would be higher in 2020 by 0.95 percentage points as a proportion of GDP if Irish Water remains on-balance sheet at that time.

Access to markets

At the same time, access to debt market was regained last year following completion of the bailout programme. Note also that current Government forecasts, set out in the spring statement assumed the State would be obliged to carry Irish Water on the balance sheet.

In respect of this year, the primary concern was always that Ireland achieved a budget deficit less than the official European target: 3 per cent of GDP. Economists say there is no threat to that arising from the Eurostat ruling.

The spring statement was predicated on a budget deficit this year of 2.3 per cent of economic output. The expectation then was that 0.29 percentage points would be trimmed from the deficit if Irish Water went off-balance sheet, bringing the deficit close to 2 per cent.

While there will be no deficit bonus now, economists say the spring Government forecast was too conservative anyway. Improved tax revenues led some analysts to predict that a deficit close to 1.3 per cent of GDP was in play.

Such forecasts may now be revised upwards, but the deficit is still on course to come in well below the all-important 3 per cent.

The spring economic statement assumed a 1.7 per cent of GDP deficit in 2016 with Irish Water on-balance sheet. This deficit would be 0.19 percentage points lower if Irish Water went off-balance sheet, according to the statement.

The forecast deficit was to decline to 0.9 per cent in 2017 and would be 0.12 percentage points lower if Irish Water went off-balance sheet, bringing the public finances another bit close to balance if it had happened.

As it stands, the forecast that balance will be achieved between 2018 and 2019 remains unchanged.

Expanded budget

In terms of 2016, the Government’s outline plan to expand the budget by between €1.2 billion and €1.5 billion was also predicated on Irish Water liabilities remaining on-balance sheet. In the wake of the Eurostat ruling, the plan remains intact. But there is more.

Even before the ruling, the Government had insisted for weeks that there was no scope whatever to go beyond €1.5 billion on budget day.

The negative ruling from Luxembourg would appear to rule out any last-minute change of mind to increase the budget package, which would only increase the deficit forecast.

Beyond 2016, the Government insists the Eurostat ruling will not curtail the available fiscal space, as existing spending on Irish Water is subsumed into the expenditure base into the future.

Whatever spending on the utility is already embraced in the current figures can be carried forward, but this is still expenditure on the balance sheet.

It goes without saying that firm plans for the period beyond 2016 cannot be made until after the election.