Next government will have scope to increase spending

The next government will have a little more scope to increase public spending than was assumed in the weeks of talks since the February election, The Irish Times has learned.

Amid the stalemate between Fine Gael and Fianna Fáil, an arcane decision by the EU statistical agency could mean the next administration will be under marginally less pressure in coming years to keep public spending in check.

Deep divisions over Irish Water remain the primary source of tension between the parties. If the schism is overcome, however, the Eurostat decision might ease the path to an eventual deal by providing some leeway to boost spending by a little more than previously anticipated.

At issue is the designation for statistical purposes of a share transaction last year in the nationalised Allied Irish Banks.

General expenditure

The extent of any new wriggle room remains unclear, however, as officials are still examining the implications of the decision.

The redemption of AIB preference shares and their conversion into ordinary shares yielded €1.6 billion for the exchequer. In view of the State’s ownership of AIB, the transaction itself was classified as a general government expenditure.

This unexpected development meant that end-2015 budget deficit was higher than expected at 2.3 per cent of GDP, almost one percentage point more than the outgoing Government’s forecast.

The AIB transaction was once-off. Still, the Government is proceeding on the basis that the money in question can be rolled into the permanent pool of allowable expenditure under complex EU budgetary rules.

This means the overall 2015 spending base carried forward into 2016 – the “expenditure benchmark” – is bigger than calculated in the budget last October.

Not all the additional money can be spent, as Dublin is required under stringent EU rules to maintain progress towards the elimination of budget deficits.

“It does have an effect on the expenditure benchmark,” said the Department of Finance spokesman in reference to the AIB decision.

“But it doesn’t necessarily follow that this can be used, because we need to consider the balanced budget rule and all expenditures need to be considered in structural terms.”

With overall tax returns on the rise, however, the statistical ruling may provide some scope to tackle a health spending overrun this year and other spending pressures without breaching European budget rules.

Strictly speaking, the rules prevent the allocation of supplementary budgets. Still, the deployment of a wider spending base for the year may provide scope to circumvent that restriction.

Structural deficit

With the headline budget deficit below the EU target of 3 per cent of GDP in 2015, the Government is now obliged to concentrate efforts on the reduction of the structural budget deficit. The structural deficit is an estimate of the permanent deficit, net of cyclical and temporary measures.

Under previous EU guidelines Dublin had been to obliged to eliminate the structural deficit by 2019. However, the target was eased to allow Ireland to target a “medium-term objective” of a 0.5 per cent structural deficit in 2019.

The 2016 structural deficit forecast in October was 2.5 per cent, declining to 1.4 per cent in 2017 and to 0.3 per cent in 2018.

These forecasts will be revised in the “stability programme update”, an annual filing to Brussels in which the Government adopts new forecasts and sets out the opening fiscal position for the budget process. This submission must be made by Thursday of this week but a delay is in prospect due to wrangling over the formation of the government.