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« Fiscal Treaty Files: Hey Everybody, Let's Stagnate Together | Main | Fiscal Treaty Files: Lost in Translation »

May 08, 2012

Comments

RosencrantzisDead

A quick question: John McHale and others use a particular metric in measuring the structural deficit. Is this metric set down anywhere in the 'Six pack' or related regulations? It is certainly not contained in the Fiscal Compact - where merely refers the reader to the six pack.

Seamus Coffey

Hi Michael,

Another interesting post. I think even you would agree that we do not know how the €5.4 billion structural deficit estimated for 2015 will be closed. It is will be some combination of growth, structural change and fiscal adjustment but at this remove we have no way of knowing what it will be.

I think it is useful to provide different scenarios showing how this can be achieved and as you show there are some that show it can be achieved with no additional fiscal adjustment. Will growth and structural change be strong enough to do the heavy lifting? We don't know but the scenarios do show that it can be done using what I would consider to be some reasonably conservative assumptions.

I would dispute that it will be the TSCG that will "cost us". The balanced-budget rule stated in terms of the structural deficit has been in place in since June 2005. It was in Council Regulation 1055/2005 which means it was part of Irish national law from the time that regulation was introduced.

There is nothing new about the structural deficit rule in the Treaty. Even if the referendum is defeated we will still be bound by Regulation 1055/2005 and will have to reduce the structural deficit. We cannot vote away the need to reduce the deficit.

In December 2005 the Department of Finance first set a Medium Term Budgetary Objective (MTO) in terms of the structural deficit. The target was set as "close to balance". The MTO has been revised and we now have a target of -0.5% of GDP; exactly the level set out in the Treaty. We will have to achieve use in line with the Stability and Growth Pact. The Treaty just restates a balance budget rule that is nearly seven years old. Where was the outcry when the rule was first introduced?

We can reject the Treaty but we cannot avoid the requirement to reduce the structural deficit. A 'Yes' vote on the Treaty will not cost us anything in that sense.

Michael Taft

RosencrantzisDead - I would refer you to John's post on IE which addresses this issue. http://www.irisheconomy.ie/index.php/2012/05/08/fiscal-rules-and-required-post-2015-austerity-measures/#comment-279071 To be fair, though I disagree with John's use of the cyclical sensitivity measurement, it is not intended to be part of the overall fiscal architecture as such. It is one variable in the computation of the structural deficit.

Seamus - my narrow concern here is whether a measurement intended to decompose the deficit into its structural and cyclical parts can be used as a structural deficit sensitivity measurement to GDP. Nothing more. I am sceptical.

On the question re: the structural deficit having been in place since 2005, I will deal with this in detail in a subsequent post. However, I would just say that a regulation is a far different beast than an international treaty; that there was no outcry as such as there was no issue (thanks in some part to the EU Commission calculating away common sense in their structural deficit estimates, resulting in the implementation of a regulation actually vindicating a speculative-fueled economy); and that the current economic conditions requires that such a narrow and abstract approach be rejected - conditions that didn't pertain in the mid-2000s when the regulation was almost superfluous.

I agree, we cannot reject the need to reduce the deficit. What we can do, however, is reject austerity (of more properly, fiscal contraction) as a means to reducing the deficit. And this is what is being done in many parts of Europe.

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