Coalition may find wriggle room to stretch public spending limits

The Government has received a boost in its campaign with the EU powers to press ahead with an increase in public spending next year.

After positive signals from Brussels in response to Dublin’s request for flexibility in the application of stringent fiscal rules, the Irish Fiscal Advisory Council has backed a “limited departure” from spending curbs in budget 2016.

Although the body has said the current spending limits are “far more constraining than required”, it warned that the scope for discretionary tax cuts in the October budget will remain “limited”.

The intervention by the council, which has statutory powers to monitor fiscal policy, comes as the Government seeks the blessing of the European authorities to proceed with a modest relaxation of controls on the amount of money it can spend next year.

The outcome of these discussions could have a bearing on pay talks with public sector unions and on the scope of a new capital investment programme.

Spending limits

In a letter to Minister for Finance Michael Noonan in recent days, European Commission vice-president Valdis Dombrovskis and economics commissioner Pierre Moscovici declared their willingness “to take a closer look at practical aspects” of the spending limits in coming weeks.

The Government is seeking to settle these matters in time for its “spring economic statement” at the end of the month, a document in which Fine Gael and Labour will set out a joint fiscal plan for the period leading into the election and the years beyond it.

As it prepares this plan, the Coalition has been seeking leeway from Brussels to spend more than strictly permissible within the framework of European budget rules which were reinforced at the height of the euro zone debt crisis.

“The spring economic statement will be built on a sensible application of the excessive deficit procedure,” said a spokesman for the Department of Finance in reference to the budget rules.

In an analytical note released today, the Fiscal Advisory Council finds serious flaws in the calculations underpinning the spending limits set for Ireland by the EU authorities. “The council supports a limited departure from the existing expenditure benchmark in 2016 provided three conditions are met,” it said.

Conditions

The first condition was to ensure a reduction of 0.5 per cent of gross domestic product in the structural deficit, an estimate of what the actual deficit would be if the economy was at full capacity.

“Second, the Government should clearly justify the departure from the existing benchmark, as well as the rationale for any new reference rate used. Third, the Government should underline its commitment to domestic multi-year expenditure ceilings,” the council said.

“Regardless of whether a relaxation of the expenditure benchmark in 2016 is eventually pursued, there is limited room for discretionary tax cuts in 2016. Tax cuts would further tighten the expenditure benchmark in circumstances where the State faces growing medium-term expenditure pressures.”

In their letter one week ago, Mr Dombrovskis and Mr Moscovici acknowledged the Government’s commitment to “responsible fiscal policies” and the timely achievement of medium-term budget targets.

But they said they appreciated Mr Noonan’s observations on the spending limits and noted that these allowed them “to better understand problems that may arise with the implementation of fiscal surveillance in practice.”