Fiscal Space: A Short Primer
Posted on June 23, 2016 by Tom McDonnell
The parameters for Budget 2017 are set by the requirements of the preventive arm of the Stability and Growth Pact (SGP). The preventive arm is assessed under two main pillars. These are the Structural Balance Rule and the Expenditure Benchmark Rule.
A balanced budget in structural terms is a balanced budget after adjusting for the cyclical position of the economy and is calculated net of once-off factors such as asset sales. The structural balance rule says that any country not at its Medium-Term Budgetary Objective (MTO) must achieve a specified minimum improvement in its structural balance. Ireland’s MTO requires a structural deficit of no worse than 0.5% of potential GDP and a minimum annual improvement of 0.6 percentage points until the lower limit of the MTO is reached.
The expenditure benchmark rule places a cap on the annual corrected growth of public spending that can only be exceeded if new discretionary revenues measures are taken which structurally increase government revenue, for example an increase to tax rates. The cap is equal to the medium-term growth rate of potential GDP and is called the reference rate.
Adherence to the fiscal rules limits the net fiscal space for new commitments to somewhere between €900 million and €1 billion in 2017. The net fiscal space available in 2018 ranges from €1.2 billion to €2.6 billion with the exact figure depending on underlying assumptions related to calculation of the economy’s output gap and structural deficit.
The latest NERI inBrief: Fiscal Space in the Republic of Ireland: A Very Short Primer explains the main concepts underlying calculation of the fiscal space.