Fiscal Space: A Short Primer

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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.

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Dr Tom McDonnell

Tom McDonnell is co-director of the Nevin Economic Research Institute and is based in the Dublin office. In addition to managing staff in the Dublin office he has co-responsibility for the NERI's research programme and for its strategic direction.  

He is also responsible for, among other things, the NERI's analysis of the Republic of Ireland economy including risks, trends and forecasts. He specialises in economic growth, economics of innovation, Irish and European economies, and fiscal policy. 

He previously worked as an economist at TASC and before that was a lecturer in economics at NUI Galway and at DCU. He has also taught at Maynooth University (MU) and is currently an occasional staff member at MU. 

Tom obtained his PhD in economics from NUI Galway. He is a native of Limerick city and lives in Maynooth.

Contact: [email protected] or 00353 1 889 77 42.