Cantillon: in balancing the budget, targets may move

All signs suggest that Brussels is poised to grant the State medium-term leeway to cut tax and boost spending. So how might that work?

This is knotty. First, note that the headline budget deficit will come in at about 1.7 per cent of GDP at the end of 2015. Thus will the current fiscal target – to bring the deficit below 3 per cent of GDP – be realised.

Attention thus turns to a new target. In question is the structural budget deficit, an estimate of the permanent deficit in the public finances net of cyclical and temporary measures. Never mind the fine grain.

The idea is to show the underlying state of the public finances by stripping out the effects of the economic cycle and once-off factors. We are in the realm of technical estimates. This is not strictly observable in data.

There will still be a structural deficit, even if the headline deficit is eliminated in 2017, as now seems possible. Under current EU agreements, Ireland is obliged to eliminate the structural deficit by 2019. The State’s “medium-term objective” is to achieve a balanced budget in structural terms in that timeframe.

Still, Budget 2016 documents show that Ireland’s objective “is subject to review by the end of this year”. At issue is whether the goal is to allow Ireland to run a 0.5 per cent structural deficit. This is significant. It is only after the “medium-term objective” is realised that more fiscal space can be allocated for tax cuts and spending increases.

The current target assumes the next administration will have €8.8 billion at its disposal for new tax-and-spending measures from 2016 to 2020. The major largesse would come only in 2020, after the structural deficit is wiped out in 2019.

It follows that a new “medium-term objective” would allow earlier moves to expand the budget. The next government could have €10 billion to play with, but the bulk of it would still have to be held over until the latter years.