Screaming in fiscal space
Nobody outside Leinster house seemed to be too bothered by the prospect of the next government (or governments – however many it takes to reach the end of the forecast period in 2021) having an extra €2bn to play with.
But it seems they do, thanks to a largely expected expansion of our old friend, the fiscal space.
The Department of Finance published a “slimline” version of the Stability Programme Update on Tuesday night, giving the expected update on its economic forecasts.
This included a well flagged decision by the government to change the Medium-Term Objective of budget policy to define a balanced budget as being a deficit in Structural Terms of up to 0.5% of GDP.
This is expected to be achieved in 2018.
The department did not set out in the published document what this means in terms of fiscal space.
Nor did it quantify the effect of the upgraded economic effect on the fiscal space available for Budget 2017.
On Wednesday the Minster for Finance Michael Noonan came in to the Dáil chamber for a hastily arranged debate on the hastily produced SPU (the Fiscal Council had the figures from the Department since 7 April). He informed the Dáil verbally of the changes to the fiscal space thus:
“At the time of the Budget last October, my Department estimated net fiscal space of €8½ billion over the period 2017-2021. My Department also clarified that if the Medium-Term Objective (MTO) was changed it would free up an additional €1.5 billion of additional fiscal space over this timeline.
The MTO has subsequently been changed.
In addition, some other inputs have also changed.
On foot of all these changes, my Department currently estimates net fiscal space of somewhere in the region of €10-11 billion over the period 2017-2021.
For next year, again arising from some of the changes into the inputs of the calculation, net fiscal space is estimated at around €900 million. I want to stress that this is a work in progress number and is subject to revision. There are lots of moving parts in the calculation – including inputs from the European Commission that only become available over the summer – and this may give rise to further variations in the figure before Budget day.”
As a reminder, the Budget book in October set out an estimate of fiscal space available for the next five budgets.
Next October’s budget – the one for 2017 – was forecast then to have a mere €500m of fiscal space. Now Mr Noonan says it will increase by €400m.
Just as well, given the additional spending pressures building across the government sector.
The other €1.5bn+ of fiscal space that comes from changing the MTO should be available for budget 2019, judging by this note issued by the department in January (interestingly it says it will be for the next government to set the MTO – though Michael Noonan seems to have done just that on Wednesday).
As we said earlier, this change was not unexpected. Just to prove it, here is a blog we wrote at the start of the election campaign (how long ago it seems now).
Back then Fianna Fáil was saying it would use the extra money from the MTO change to reduce debt, not increase spending or cut taxes.
Finally, a rare treat for all Irish economic nerds – a video from the Department of Finance, starring its Chief economist John McCarthy, going through the main points of the Stability Programme Update.
Comment via Twitter: @seanwhelanRTE