Political promises will have to fit with EU spending rules

Whatever the programme for government may promise, future budgets will be hamstrung by EU restrictions on spending.

The figures are notoriously difficult to calculate but the Department of Finance estimates net fiscal space — the amount of money available for tax cuts and investment — is in the region of €10-11bn for the next five years.

However, the final number will depend on factors outside the government’s control.

One is how the economy performs in the coming years. EU rules link government spending to long-term potential GDP growth, capping the amounts available to fund budget giveaways.

The rules also force countries to slash debt faster when the economy is performing well.

And, according to the European Commission’s latest forecasts, Ireland remains the EU’s fastest growing economy with growth of 4.9% this year and is set to stay near the top of the EU league table next year.

Another factor to watch is how EU statisticians classify government spending.

Last week it was reported available fiscal space might be curtailed in a bid by Eurostat, the EU’s statistics agency, to reclassify public-private partnerships on the government books.

Ireland has become all too familiar with the EU’s penchant for putting semi-state bodies on the books.

The former Fianna Fáil government managed to keep Nama off its balance sheet, but last year the Fine Gael-led government wasn’t so lucky with Irish Water, which is being counted as a government entity.

The utility is weighing even more on public finances, as the government will lose out on millions of euros in revenue due to the suspension of water charges for the next nine months.

All of these factors will leave the government with even less cash to invest in much-needed infrastructure, which is struggling under the weight of years of underinvestment.

Public investment stands at 1.8% of GDP in Ireland, the lowest in the EU where the average is 2.8%. And then there is the Brexit factor.

Estimates vary as to the impact on Ireland of the UK leaving the EU in a referendum on June 23.

The Economic and Social Research Institute famously said that trade between Ireland and the UK would drop by a fifth in the event of a UK exit from the EU, while employers’ group Ibec said that Ireland might even make gains, predicting that foreign direct investment into Ireland could increase by 2%.

Another major decision that could go either way for the government is in relation to Apple.

The European Commission is currently investigating whether the tech giant enjoyed unfair tax advantages in Ireland under a sweetheart tax deal it did with the government.

Brussels has already ordered the Netherlands and Luxembourg to claw back up to €30m each from Fiat and Starbucks in similar rulings.

While the money would be a potential windfall for the exchequer, it may scare off other companies thinking of investing in Ireland, and the government has promised to take the EU to court if the ruling is negative.

All of these considerations will be weighed by the EU and distilled into economic recommendations to be published on May 18.

The recommendations will also show whether the government’s estimates of available fiscal space are correct.

Last week the EU said the Irish budget deficit will come in at 1.1% of GDP this year thanks to higher growth and lower than foreseen spending. That’s lower than forecast and well below the EU’s upper limit of 3%.

But despite the good news, strict EU spending rules will continue to apply, and the government is legally bound to strive for a balanced budget in the medium term - and a “structural” budget deficit (stripping out cyclical and one-off economic effects and interest payments) of no more than 0.5% of GDP.

The government was already warned by the Commission last year that it risked breaching EU rules because of €1.5bn in extra spending agreed in Budget 2016.

However, Finance Minister Michael Noonan might be able count on the fact that EU budget rules are open to negotiation.The EU has been reluctant to penalise countries - particularly larger, more powerful EU members - for failing to meet their deficit targets.

EU auditors criticised the Commission in a report last month for going too easy on France and Italy, who were not punished despite repeatedly missing debt-reduction targets.

But despite being the EU’s star growth pupil, the Commission is unlikely to bend the rules for Ireland.


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