Fiscal Assessment Report

I|sca| Assessment keport
november 2013

lrlsh llscal Advlsory Councll 2013

lS8n 978 0 9370333 6 4

1hls reporL can be downloaded aL www.f|sca|counc||.|e

CCN1LN1S
ICkLWCkD ................................................................................................................................................. l
SUMMAk ASSLSSMLN1 ........................................................................................................................... II
1. LNDCkSLMLN1 AND ASSLSSMLN1 CI MACkCLCCNCMI C ICkLCAS1S ......................................... 1
SuMMA8? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. 1 l n18CuuC1l Cn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. 2 1PL 8AS l S lC8 1PL LnuC8SLMLn1 lunC1l Cn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. 3 1PL CCunCl L' S A8CACP 1C LnuC8SLMLn1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1. 4 LnuC8SLMLn1 Cl 1PL 8uuC 1 2014 8C! LC1l CnS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1. 3 An ASSLSSMLn1 Cl lC8LCAS 1S CCn1Al nLu l n 8uuC1 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1. 6 unCL81Al n1? Su88Cunul nC lC8LCAS1S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2. ASSLSSMLN1 CI 8UDGL1Ak ICkLCAS1S .................................................................................... 27
SuMMA8? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2. 1 l n18CuuC1l Cn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2. 2 uLA81MLn1 Cl ll nAnCL 8uuCL1A8? 8C! LC1l CnS lC8 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2. 3 An ASSLSSMLn1 Cl 8uuC1 2014 lC8LCAS1S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2. 4 SLnSl 1l vl 1? Anu 8l Sk AnAL?S l S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3. ASSLSSMLN1 CI CCMLI ANCL WI 1n II SCAL kULLS .................................................................... S9
SuMMA8? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3. 1 l n18CuuC1l Cn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3. 2 CCMLl AnCL Wl 1P 1PL ll SCAL 8uLLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3. 3 1PL Lu 1WC ACk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4. ASSLSSMLN1 CI 1nL II SCAL S1ANCL ............................................................................................ 71
SuMMA8? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
4. 1 l n18CuuC1l Cn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4. 2 8Lvl LW Cl 1PL ll SCAL S1AnCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4. 3 PAS ll SCAL Au! uS1MLn1 WC8kLu 1C S1A8l Ll SL 1PL u8Ll C ll nAnCLS Anu 8LS1C8L
C8Lul 1WC81Pl nLSS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
4. 4 8L?Cnu 2013: CLl C? 8L Cul 8LMLn1S Anu Lx1LnuLu ll SCAL 8C! LC1l CnS . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4. 3 8L?Cnu 1PL 8Al LCu1: 8LuuCl nC 1PL l8ACl Ll 1? Cl l 8L LAnu' S C8Lul 1WC81Pl nLSS . . . . . . . . . . . . . . . . . . . 87

8Cx A: 1PL LnuC8SLMLn1 lunC1l Cn Anu 1PL MLMC8AnuuM Cl unuL8S1Anul nC .............................. 3
8Cx 8: lC8LCAS1S Cn A MCS1 Ll kLL?" 8ASl S - 1PL MLAnl nC Cl 1PL 8uuCL1 8C! LC1l CnS . . . . . . . . 6
8Cx C: AnnuAL Cu C8CW1P Anu CA88?CvL8 LllLC1S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8Cx u: 1PL u?nAMl CS Cl 8ALAnCL SPLL1 8LCLSSl CnS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8Cx L: l MAC1 Cn lC8LCAS1S Cl 8uuCL1 MCvl nC 1C CC1C8L8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8Cx l: 1PL MLul uM- 1L8M LxLnul 1u8L l8AMLWC8k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8Cx C: l nCLn1l vL CPAL LLnCLS l n u8Ll C LxLnul 1u8L MAnACLMLn1: 1PL SCl1 8uuCL1
CCnS18Al n1 Anu 1PL 8A1CPL1 LllLC1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8Cx P: 1PL MLul uM- 1L8M 8uuCL1A8? C8! LC1l vL ( M1C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
8Cx l : 1PL Lu LxLnul 1u8L 8LnCPMA8k .................................................................................................. 67
AnnLx A: ll SCAL CCunCl L 8LnCPMA8k 8C! LC1l CnS 24 SL1LM8L8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
AnnLx 8: MAC8CLCCnCMl C lC8LCAS1S LnuC8SLu 8? 1PL CCunCl L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
AnnLx C: MAC8CLCCnCMl C lC8LCAS1 1A8LLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
AnnLx u: uLA81MLn1 Cl ll nAnCL 8uuCL1A8? lC8LCAS1S l n 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
AnnLx L: LxCPLCuL8 uA1A l n 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
AnnLx l: uLA81MLn1 Cl ll nAnCL 8uuCL1A8? Cu1L CCk 1C 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
AnnLx C: ll SCAL 18AnSA8LnC? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
AnnLx P: 1PL MLul uM- 1L8M LxLnul 1u8L l8AMLWC8k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
AnnLx l : ll SCAL 8LSCnSl 8l Ll 1? AC1 Anu Lu ll SCAL 8uLLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
AnnLx ! : l LLuS18A1l vL SCLnA8l CS l n Su 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
CL CSSA8? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
SCu8CLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

lotewotJ
l

ICkLWCkD
1he lrlsh llscal Advlsory Councll was esLabllshed as parL of a wlder agenda of reform of lreland's
budgeLary archlLecLure as envlsaged ln Lhe rogramme for CovernmenL 2011. 1he Councll was
lnlLlally seL up on an admlnlsLraLlve basls ln !uly 2011, and was formally esLabllshed as a sLaLuLory
body ln uecember 2012 under Lhe llscol kespooslblllty Act (lkA). 1he Councll ls a publlc body
funded from Lhe CenLral lund. 1he Lerms of lLs fundlng are seL ouL ln Lhe lkA.
1he mandaLe of Lhe lrlsh llscal Advlsory Councll ls:
! 1o endorse, as lL conslders approprlaLe, Lhe macroeconomlc forecasLs prepared by Lhe
ueparLmenL of llnance on whlch Lhe 8udgeL and SLablllLy rogramme updaLe are based,
! 1o assess Lhe offlclal forecasLs produced by Lhe ueparLmenL of llnance,
! 1o assess CovernmenL compllance wlLh Lhe budgeLary rule as seL ouL ln Lhe lkA,
! 1o assess wheLher Lhe flscal sLance of Lhe CovernmenL ln each 8udgeL and SLablllLy
rogramme updaLe ls conduclve Lo prudenL economlc and budgeLary managemenL,
lncludlng wlLh reference Lo Lhe provlslons of Lhe SLablllLy and CrowLh acL.
1he Councll submlLs lLs llscol Assessmeot kepotts Lo Lhe MlnlsLer for llnance and wlLhln 10 days
releases Lhem publlcly.
1he Councll ls chalred by rofessor !ohn McPale, naLlonal unlverslLy of lreland, Calway. CLher
Councll members are Mr SebasLlan 8arnes, CrganlsaLlon for Lconomlc Co-operaLlon and
uevelopmenL, rofessor Alan 8arreLL, Lconomlc and Soclal 8esearch lnsLlLuLe, ur uonal uonovan,
unlverslLy of Llmerlck (formerly lnLernaLlonal MoneLary lund sLaff) and ur 8lsln C'Sulllvan,
AssoclaLe rofessor, SmlLh College, MassachuseLLs.
1he Councll would llke Lo acknowledge Lhe help of ?vonne McCarLhy, LoreLLa C'Sulllvan and
uwayne rlce (CenLral 8ank of lreland) as well as uelrdre WhlLaker.
llnally, Lhe Councll would llke Lo Lhank Lhe Councll SecreLarlaL - ularmald SmyLh (Chlef LconomlsL
and Pead of SecreLarlaL), !ohn Powlln and 8achel !oyce - for Lhelr exLenslve conLrlbuLlons Lo Lhe
reporL.
1hls reporL was flnallsed on 19 november 2013. More lnformaLlon on Lhe lrlsh llscal Advlsory
Councll can be found aL www.flscalcouncll.le
llscol Assessmeot kepott, Novembet 201J
ll

SUMMAk ASSLSSMLN1
!"#$%&# (#)*#&++ ,+ -&,.* /01& ,. #&(0,#,.* $%& ("-2,3 4,.0.3&+5 -"$ 3%0.*&+ $) (20..&1
-"1*&$0#6 017"+$/&.$+ %08& #&/)8&1 $%& /0#*,. )4 +04&$69
Cood progress conLlnues Lo be made ln brlnglng susLalnablllLy Lo Lhe publlc flnances and resLorlng
Lhe borrowlng capaclLy of Lhe SLaLe. 1he Ceneral CovernmenL debL-Lo-Cu raLlo ls pro[ecLed Lo
peak Lhls year aL 124.1 per cenL before decllnlng by approxlmaLely 10 percenLage polnLs over Lhe
perlod Lo 2016. Cverall, Lhe CovernmenL's planned flscal sLance ls assessed Lo be conduclve Lo
prudenL economlc and budgeLary managemenL".
Powever, Lhe declslon Lo reduce Lhe planned flscal ad[usLmenL ln 8oJqet 2014 has ellmlnaLed Lhe
prevlously exlsLlng margln of safeLy relaLlve Lo Lhe key 3 per cenL SLablllLy and CrowLh acL deflclL
celllng for 2013. An analysls based on hlsLorlc growLh forecasL errors suggesLs LhaL Lhe probablllLy
of breachlng Lhe 3 per cenL celllng has rlsen from an esLlmaLed 1-ln-3 Lo an esLlmaLed 1-ln-2,
assumlng no changes ln planned ad[usLmenLs for 8oJqet 2015.
1here should be no reducLlon ln Lhe CovernmenL's prevlously announced ad[usLmenLs of t2 bllllon
for 2013.
:%& ;)".3,2 %0+ &.1)#+&1 $%& /03#)&3).)/,3 (#)7&3$,).+ ".1&#26,.* <"1*&$ =>?@9
under new Lu requlremenLs, Lhe Councll has been Lasked wlLh lndependenLly scruLlnlslng and
endorslng Lhe macroeconomlc pro[ecLlons underplnnlng 8udgeLs and SLablllLy rogramme
updaLes. 1hls ls a slgnlflcanL change ln lreland's budgeLary archlLecLure and should help Lo lmprove
Lhe accuracy and Lransparency of offlclal macroeconomlc forecasLs. 1he Councll has developed lLs
own forecasLlng meLhods and analyLlcal capaclLy Lo supporL Lhls funcLlon. 1he approach Lo Lhe
endorsemenL exerclse ls descrlbed ln deLall ln Lhls reporL.
1he Councll's endorsemenL ls based on wheLher Lhe forecasLs are wlLhln an endorseable range of
approprlaLe forecasLs, Laklng lnLo accounL Lhe meLhodology and Lhe plauslblllLy of Lhe [udgemenLs
lnvolved. 1hls range reflecLs, ln parL, Lhe uncerLalnLy surroundlng any growLh forecasL.
As parL of Lhe endorsemenL exerclse, Lhe Councll expressed a slgnlflcanL reservaLlon abouL one
elemenL of Lhe macroeconomlc forecasLs prepared for 8oJqet 2014. 1hls reservaLlon relaLed Lo Lhe
lmplled quarLerly proflle for consumpLlon spendlng. Powever, followlng clarlflcaLlons by Lhe
5ommoty Assessmeot
lll

ueparLmenL of llnance on Lhe assumpLlons relaLlng Lo daLa revlslons, Lhe Councll assessed LhaL Lhe
forecasLs were wlLhln lLs endorseable range.
<"$ #,+A+ 0#& $,2$&1 $) $%& 1)B.+,1&9
1he ueparLmenL of llnance ls pro[ecLlng real Cu growLh of 0.2 per cenL ln 2013, rlslng Lo 2 per
cenL ln 2014. CrowLh Lhls year ls belng depressed by a number of facLors. 1hese lnclude a
background of ongolng balance sheeL repalr, budgeLary consolldaLlon and weak demand ln
lreland's maln Lradlng parLners. 1he pharmaceuLlcals paLenL cllff" ls also reduclng Lhe growLh of
neL exporLs. uncerLalnLles relaLlng Lo Lhese elemenLs mean LhaL rlsks Lo Lhe forecasLs are LllLed Lo
Lhe downslde for 2014.
<"1*&$ (#)7&3$,).+ 0#& 0++&++&1 $) -& 0((#)(#,0$&9
1he budgeLary pro[ecLlons ln 8oJqet 2014 are assessed Lo be approprlaLe, buL are conLlngenL on
Lhe dellvery of slgnlflcanL expendlLure savlngs and achlevlng Lhe pro[ecLed acceleraLlon ln
economlc growLh. AddlLlonal rlsks sLem from conLlngenL llablllLles assoclaLed malnly wlLh Lhe
banklng secLor.
1here was some publlc confuslon on Lhe slze and composlLlon of Lhe budgeLary ad[usLmenL
conLalned ln 8oJqet 2014. noLwlLhsLandlng welcome recenL lmprovemenLs ln flscal reporLlng,
fuLure 8udgeL sLaLemenLs should ldenLlfy clearly Lhe lmpacLs of consolldaLlon measures.
C.1 -"1*&$0#6 (#)7&3$,).+ 0#& 3).+,+$&.$ B,$% 3)/(2,0.3& B,$% 022 .0$,).02 0.1 D"#)(&0. 4,+302
#"2&+9
8oJqet 2014 pro[ecLlons lmply compllance wlLh Lhe naLlonal 8udgeLary 8ule ln 2013 and ln each
forecasL year ouL Lo 2016. 1hls ls because Lhe Ad[usLmenL aLh CondlLlon for Lhe sLrucLural balance
Lo converge Lowards lreland's Medlum-1erm 8udgeLary Cb[ecLlve (M1C) ls meL.
:%& ;)".3,2 B)"21 %08& +"(()#$&1 0. 0((2,30$,). 4)# 0 (#&30"$,).0#6 3#&1,$ 2,.&9
Clven a fraglle lnLernaLlonal flnanclal envlronmenL, Lhe Councll would have supporLed an
appllcaLlon for a precauLlonary credlL llne. rovlded lL had come wlLh reasonable Lerms and
condlLlons, such a faclllLy would have provlded valuable addlLlonal proLecLlon agalnsL any renewed
fundlng pressures as lreland exlLs Lhe Lu/lMl asslsLance programme.
oJotsemeot ooJ Assessmeot of Moctoecooomlc lotecosts
1

1. LnuC8SLMLn1 Anu ASSLSSMLn1 Cl MAC8CLCCnCMlC lC8LCAS1S
SUMMAk
! under Lhe so-called 1wo ack" of Lu regulaLlons, Lhe Councll has been asslgned as Lhe
lndependenL body requlred Lo endorse Lhe macroeconomlc pro[ecLlons underplnnlng 8udgeLs
and SLablllLy rogramme updaLes. 1he obllgaLlon for Lhe ueparLmenL of llnance Lo submlL lLs
forecasLs Lo exLernal scruLlny and approval ls a slgnlflcanL change ln lreland's budgeLary
archlLecLure. 1hls should help Lo lmprove Lhe accuracy and Lransparency of offlclal
macroeconomlc forecasLs.
! 1he Councll has developed lLs own forecasLlng meLhods and analyLlcal capaclLy ln order Lo
provlde a benchmark seL of pro[ecLlons agalnsL whlch Lo [udge Lhe ueparLmenL of llnance's
forecasLs.
! 1he Councll endorsed Lhe macroeconomlc forecasLs underlylng 8oJqet 2014 based on a
provlslonal flnal seL of pro[ecLlons provlded by Lhe ueparLmenL of llnance ln advance of Lhe
8udgeL. 1he Councll was saLlsfled LhaL Lhese forecasLs were wlLhln lLs endorseable range, Laklng
lnLo accounL Lhe meLhodology and Lhe plauslblllLy of Lhe [udgemenLs made.
! As parL of Lhe endorsemenL exerclse, Lhe Councll expressed a slgnlflcanL reservaLlon relaLlng Lo
Lhe quarLerly proflle for personal consumpLlon expendlLure glven Lhe CenLral SLaLlsLlcs Cfflce's
(CSC) esLlmaLes for Lhe flrsL half of 2013. 1hls was resolved followlng clarlflcaLlons by Lhe
ueparLmenL of llnance regardlng Lhelr assumpLlons relaLlng Lo posslble daLa revlslons.
! 1he macroeconomlc forecasLs ln 8oJqet 2014 assume Cu growLh of 0.2 per cenL ln 2013,
acceleraLlng Lo 2 per cenL ln 2014, supporLed by sLronger domesLlc demand and neL exporLs.
! 1he growLh ouLLurn for 2013 ls llkely Lo be depressed by a number of speclflc facLors. 1hese
lnclude a background of on-golng balance sheeL repalr, budgeLary consolldaLlon and anaemlc
demand ln some of lreland's maln Lradlng parLners. 1he pharmaceuLlcals paLenL cllff" ls also
llkely Lo have a dampenlng effecL on exporL growLh over several years. 1hese headwlnds are
expecLed Lo ease gradually, enabllng neL exporLs and domesLlc demand Lo plck up lnLo 2014.
! 1here are conslderable rlsks around Lhe 8oJqet 2014 growLh forecasL. 1he Councll agrees wlLh
Lhe assessmenL ln Lhe 8udgeL documenLaLlon LhaL whlle Lhere are rlsks on boLh sldes of Lhe
forecasL, Lhey appear Lo be LllLed Lo Lhe downslde".
2

1. 1 l n1 8 CuuC1 l Cn
1he Councll was glven an addlLlonal mandaLe ln !uly 2013 Lo endorse Lhe macroeconomlc
pro[ecLlons ln fuLure 8udgeLs and SLablllLy rogramme updaLes. 1hls marks a slgnlflcanL change ln
lreland's budgeLary archlLecLure. lor Lhe Councll, lL creaLes an lmporLanL new responslblllLy.
SecLlon 1.2 provldes Lhe background Lo Lhe endorsemenL funcLlon. SecLlon 1.3 seLs ouL Lhe
Councll's general approach Lo endorsemenL ln Lerms of a framework and Lhe meLhodologles used
Lo supporL Lhe endorsemenL exerclse. SecLlon 1.4 summarlses some of Lhe key elemenLs of how
Lhls approach was applled Lo Lhe endorsemenL of Lhe 8oJqet 2014 pro[ecLlons.
1he Councll's mandaLe Lo assess Lhe offlclal macroeconomlc pro[ecLlons remalns ln place, alongslde
Lhe endorsemenL funcLlon. SecLlon 1.3 provldes Lhe Councll's overvlew of economlc developmenLs
and an assessmenL of Lhe forecasLs conLalned ln 8oJqet 2014. llnally, SecLlon 1.6 concludes wlLh
an assessmenL of Lhe uncerLalnLy surroundlng Lhe economlc ouLlook.
1. 2 1PL 8AS l S l C8 1 PL LnuC8 S L ML n1 lunC1 l Cn
ln 2011, Lhe Councll was esLabllshed as an lndependenL body Lo assess" Lhe CovernmenL's
macroeconomlc pro[ecLlons, boLh on a backward- and forward-looklng basls. Powever, Lhere was
no obllgaLlon for Lhe CovernmenL Lo Lake Lhe Councll's assessmenLs lnLo accounL.
1
1hese
assessmenLs were quallLaLlve ln naLure and Lhe Councll dld noL commenL on Lhe forecasLs ahead of
any budgeLary declslons or relevanL Lu dlscusslons.
ln !uly 2013, Lhe Councll was glven a new endorsemenL funcLlon fulfllllng requlremenLs under Lhe
so-called 1wo ack" of Lu regulaLlons, now enshrlned ln lrlsh law (see ChapLer 3). 1he operaLlonal
elemenLs assoclaLed wlLh Lhls funcLlon are seL ouL ln a Memorandum of undersLandlng (Mou)
slgned beLween Lhe ueparLmenL of llnance and Lhe Councll (8ox A).
2

1
1he CovernmenL has responded Lo Lhe Councll's prevlous llscol Assessmeot kepotts ln lLs offlclal publlcaLlons.
2
1he Mou ls avallable aL: hLLp://www.flscalcouncll.le
3

3
lormally, (1) Lu 8egulaLlon no 473/2013 on common provlslons for monlLorlng and assesslng drafL budgeL plans and
ensurlng Lhe correcLlon of excesslve deflclL of Lhe Member SLaLes ln Lhe Luro Area, and (2) 8egulaLlon no 472/2013 on
Lhe sLrengLhenlng of economlc and budgeLary survelllance of Members SLaLes ln Lhe Luro Area experlenclng or
LhreaLened wlLh serlous dlfflculLles wlLh respecL Lo Lhelr flnanclal sLablllLy.
4
1he Mlolstets ooJ 5ectetotles (AmeoJmeot) Act 201J amends Lhe llscol kespooslblllty Act (2012) Lo lnclude a
macroeconomlc forecasL endorsemenL funcLlon.
8Ck A: 1nL LNDCkSLMLN1 IUNC1I CN AND 1nL MLMCkANDUM CI UNDLkS1ANDI NG
1he Councll's endorsemenL funcLlon has lLs orlglns ln Lhe 1wo ack" of new Lu flscal
regulaLlons LhaL came lnLo force on 30 May 2013.
3

Cne elemenL of Lhe 1wo ack" - whlch deals largely wlLh procedures Lo sLrengLhen flscal
governance ln Lhe Luro Area and Lo reduce flscal and flnanclal rlsks - ls Lhe requlremenL
LhaL Lhe macroeconomlc forecasLs underplnnlng 8udgeLs and SLablllLy rogramme updaLes
musL elLher be made lndependenLly or endorsed by lndependenL bodles.
ln lreland, Lhe CovernmenL declded LhaL Lhe endorsemenL" approach would be adopLed.
1he ueparLmenL of llnance remalns responslble for Lhe forecasLs, wlLh Lhe Councll Lasked as
Lhe lndependenL body whlch would underLake Lhe endorsemenL funcLlon. lollowlng
dlscusslons, a [olnL Memorandum of undersLandlng (Mou) was slgned by Lhe Councll and
Lhe ueparLmenL of llnance.
lormally, Lhe endorsemenL funcLlon has been lmplemenLed Lhrough an amendmenL Lo Lhe
llscol kespooslblllty Act 2012 LhaL provldes a new elemenL Lo Lhe Councll's mandaLe, Lo
...endorse, as lL conslders approprlaLe, Lhe macroeconomlc forecasLs prepared by Lhe
ueparLmenL of llnance on whlch Lhe 8udgeL and SLablllLy rogramme wlll be based".
4
lor
Lhe purposes of Lhe 8udgeL, Lhe forecasLs do noL lnclude Lhe lmpacL of flnal declslons on
dlscreLlonary Lax and expendlLure measures.
1he Mou beLween Lhe Councll and Lhe ueparLmenL of llnance governs Lhe operaLlonal
aspecLs of Lhe endorsemenL funcLlon. lL seLs ouL Lhe background Lo Lhe endorsemenL
exerclse and provldes deLalls on Lhe coverage of Lhe macroeconomlc pro[ecLlons endorsed,
Lhe lnformaLlon requlremenLs and Lhe approach Lo be followed. 1he Llmlng and
arrangemenLs around Lhe endorsemenL process are also dealL wlLh ln Lhe Mou.
1he Mou ls ln llne wlLh guldellnes on how Lo lmplemenL Lhe 1wo ack", lncludlng Lhe
requlremenL Lo puL ln place arrangemenLs Lo govern Lhe lmplemenLaLlon process (LC,
2013b). 1hese lnclude:
! 1he Councll wlll communlcaLe regularly abouL lLs approach Lo Lhe endorsemenL
funcLlon, lncludlng Lhe analysls underplnnlng lLs assessmenLs.
! 1he Councll wlll make clear wheLher or noL lL endorses Lhe forecasLs. ln Lhe evenL LhaL
Lhe Councll were Lo conclude LhaL lL had slgnlflcanL reservaLlons when presenLed wlLh
Lhe prellmlnary forecasLs ln advance of Lhe 8udgeL or Lhe SLablllLy rogramme, Lhls
would be communlcaLed Lo Lhe ueparLmenL of llnance. lurLher dlscusslons could Lhen
Lake place Lo produce a revlsed forecasL addresslng Lhe concerns LhaL Lhe Councll
ralsed. lf aL Lhe end of Lhe process Lhe Councll was noL ln a poslLlon Lo endorse Lhe
macroeconomlc forecasLs, Lhe absence of an endorsemenL and underlylng reasons for lL
would be seL ouL by Lhe Councll.
4

1he obllgaLlon for Lhe ueparLmenL of llnance Lo submlL lLs forecasLs ln advance Lo exLernal scruLlny
and endorsemenL ls a slgnlflcanL change ln lreland's budgeLary archlLecLure. unLll recenL years,
Lhere was no dlrecL revlew of offlclal forecasLs produced by Lhe ueparLmenL of llnance and Lhe
new funcLlon ls a slgnlflcanL exLenslon of Lhe Councll's role.
3

1he alm of Lhe endorsemenL funcLlon ls Lo help Lo ensure LhaL forecasLs are boLh unblased and as
accuraLe as posslble. ln parLlcular, many counLrles have suffered from opLlmlsm blas" ln offlclal
forecasLs, where Lhe pollLlcal sysLem creaLes lncenLlves Lo make over-opLlmlsLlc growLh forecasLs
LhaL lmply sLrong revenue growLh so as Lo appear Lo ease flscal consLralnLs. ln Lhe case of lreland, lL
ls noL clear LhaL Lhere has been such a blas alLhough Lhere have been perlods marked by large and
perslsLenL forecasL errors (see for example, llAC, 2012b, 2013a). CuLslde scruLlny of Lhe
ueparLmenL of llnance's macroeconomlc pro[ecLlons could help Lo lmprove forecasL performance.
6

1. 3 1PL CCunCl L ' S A 8 CAC P 1 C LnuC8 S L ML n1
1he Councll ls requlred Lo .endorse, as lL conslders approprlaLe, Lhe macroeconomlc forecasLs
prepared by Lhe ueparLmenL of llnance.". 1he Mou furLher speclfles LhaL lL should:
.conslder Lhe approprlaLeness of Lhe forecasLs (as mosL llkely pro[ecLlons), Laklng
lnLo accounL Lhe sulLablllLy of Lhe underlylng forecasL meLhodology and Lhe
plauslblllLy of Lhe [udgemenLs embedded ln Lhe pro[ecLlons.
1hls secLlon seLs ouL Lhe framework and underlylng meLhodologles used by Lhe Councll Lo lnform
lLs endorsemenL.
1. 3 . 1 1 PL CCunC l L ' S Lnu C8 S L ML n1 l8 AML WC8 k
1he Councll's approach Lo endorsemenL focuses on wheLher Lhe macroeconomlc forecasLs are
wlLhln a range of approprlaLe forecasLs. 1he range, referred Lo as Lhe endorsable range" ls
lnformed by benchmark pro[ecLlons prepared by Lhe Councll's SecreLarlaL (see below). 1he concepL
of a range reflecLs Lhe hlgh degree of underlylng uncerLalnLy surroundlng economlc forecasLlng,

3
1here were occaslonal assessmenLs of Lhe ueparLmenL of llnance's forecasLlng performance buL Lhese were noL
sysLemaLlc. lor example, see Lhe 2010 reporL 5tteoqtbeoloq tbe copoclty of tbe uepottmeot of lloooce, avallable from:
hLLp://www.flnance.gov.le/documenLs/publlcaLlons/reporLs/2011/depLrevlew.pdf
6
As well as Lhe Councll's endorsemenL funcLlon, aL a Luropean level, macroeconomlc survelllance has been LlghLened as
a resulL of reforms Lo Lhe 5toblllty ooJ Ctowtb loct.
3

lncludlng Lhe posslblllLy of daLa revlslons.
7
1he polnL forecasLs conLalned wlLhln each 8udgeL (and
SLablllLy rogramme) remaln Lhe responslblllLy of Lhe ueparLmenL of llnance and lL would be
lnapproprlaLe for Lhe Councll Lo underLake Lhe role of forecasLer by lnslsLlng on speclflc forecasL
numbers.
1he endorseable range ls lnformed by Lhe Councll's work on gauglng Lhe hlsLorlcal level of
macroeconomlc uncerLalnLy. 1hls ls reflecLed ln fan charL analysls underLaken by Lhe Councll based
on Lhe slze of pasL forecasL errors.
8
lL ls recognlsed, however, LhaL Lhe paLLern of prevlous forecasL
errors may noL necessarlly be a rellable gulde Lo currenL (and fuLure) uncerLalnLles.
1he Councll does noL see Lhe deLermlnaLlon of Lhe range as a mechanlcal exerclse. lL ls anLlclpaLed
LhaL lLs slze wlll be meanlngfully lnformed by [udgemenLs abouL Lhe accepLablllLy of dlfferenL
ranges of uncerLalnLy. 1he slze of Lhe endorseable range wlll vary across Llme and for dlfferenL
varlables dependlng on economlc condlLlons, maklng a flxed numerlcal range lnapproprlaLe.
Moreover, by noL speclfylng an expllclL range, Lhe poLenLlal for Lhe range Lo lnfluence Lhe seLLlng of
ueparLmenL of llnance forecasLs ls avolded.
9

1he Councll ls requlred Lo assess wheLher Lhe forecasLs are approprlaLe as mosL llkely"
pro[ecLlons. As explalned ln 8ox 8, Lhls makes clear whaL assumpLlons abouL rlsk are embodled ln
Lhe forecasL and could deLermlne wheLher a speclflc forecasL number ls wlLhln Lhe endorseable
range.

7
See Mou .1he Councll recognlses Lhe lnherenL uncerLalnLy surroundlng forecasLs and LhaL approprlaLe forecasLs may
lle wlLhln a range.", Whlle polnL esLlmaLes of macroeconomlc varlables are requlred as forecasL ouLpuLs, boLh parLles
noLe LhaL ouLpuL volaLlllLy and Lhe magnlLude of revlslons Lo lrlsh economlc aggregaLes can be large."
8
See, Annex A: lan CharLs Lo 8epresenL lorecasL uncerLalnLy, pp. 71-73, ln llAC, 2012b.
9
lf Lhe range was known, Lhe ueparLmenL of llnance mlghL have an lncenLlve Lo Lry Lo anLlclpaLe Lhe Councll's
benchmark pro[ecLlon and endorseable range and seL lLs forecasLs accordlngly. Whlle Lhere ls no reason Lo belleve LhaL
Lhls would happen ln pracLlce, Lhe posslblllLy may warranL some cauLlon ln lndlcaLlng any speclflc range.
6

8Ck 8: ICkLCAS1S CN A "MCS1 LI kLL" 8ASI S - 1nL MLANI NG CI 1nL 8UDGL1
kCI LC1I CNS
1he Mou requlres Lhe Councll Lo assess Lhe approprlaLeness of ueparLmenL of llnance
forecasLs .. as mosL llkely pro[ecLlons". 1hls makes expllclL - for Lhe flrsL Llme - Lhe basls
of Lhe ueparLmenL of llnance's macroeconomlc forecasLs and provldes useful lnformaLlon
abouL how Lo lnLerpreL and evaluaLe Lhe forecasLs.
Clven Lhe volaLlllLy of Lhe economy and Lhe effecL of unforeseen shocks, economlc forecasLs
are lnherenLly uncerLaln. A compleLe forecasL would, Lherefore, glve a range of ouLcomes
wlLh Lhelr correspondlng probablllLles. 1hls could be expressed as a probablllLy dlsLrlbuLlon,
as Lhe Councll regularly shows Lhrough fan charLs. Powever, pro[ecLlons are Lyplcally made
and reporLed as a slngle flgure. 1hls requlres a cholce of a number Lo summarlse Lhe cenLral
Lendency of Lhe forecasL dlsLrlbuLlon.
MosL llkely" (modal) pro[ecLlons refer Lo Lhe ouLcome wlLh Lhe hlghesL probablllLy of
occurrlng, lrrespecLlve of where Lhls ls on Lhe probablllLy dlsLrlbuLlon. 8y conLrasL, a common
alLernaLlve assumpLlon ls Lo make an expecLed-value forecasL, l.e., Lhe average of each
posslble ouLcome welghLed by lLs probablllLy. ln many cases, lncludlng prevlous ueparLmenL
of llnance pro[ecLlons, Lhe basls of Lhe forecasLs ls noL expllclL.
MosL-llkely and expecLed-value forecasLs can be ldenLlcal or slmllar ln many cases, for
example, lf Lhe dlsLrlbuLlon of ouLcomes follows a normal dlsLrlbuLlon.
Powever, Lhere may be subsLanLlal dlfferences lf Lhe dlsLrlbuLlon of rlsks ls skewed. lor
example, llgure 81 shows Lhe probablllLy dlsLrlbuLlon for Lwo dlfferenL forecasLs. 1he mosL
llkely ouLcome ln boLh cases ls zero growLh. WlLh balanced rlsks around Lhe forecasL (blue
llne), Lhe expecLed-value forecasL ls also for zero growLh. 8y conLrasL, for a forecasL wlLh
rlsks LllLed on Lhe downslde (red llne), Lhe expecLed-value forecasL ls -0.7 per cenL.

0
0.01
0.02
0.03
0.04
0.03
0.06
0.07
-4 -3 -2 -1 0 1 2 3 4
r
o
b
a
b
l
l
l
L
y

CrowLh forecasL ln
ll Cu8L 81: CCMA8l SCn Cl A 8ALAnCLu Anu SkLWLu lC8LCAS1
ul S18l 8u1l Cn
8alanced rlsks
uownslde rlsks
LxpecLed value (mean) of downslde rlsks scenarlo
Note. 8oLh forecasL dlsLrlbuLlons have a mode of zero and a sLandard error of 1.3, whlch ls
equlvalenL Lo Lhe one-year ahead forecasL uncerLalnLy ln Lhe Councll's fan charLs.
7

1he Councll's endorsemenL of 8oJqet 2014 covers Lhe seL of macroeconomlc pro[ecLlons for 2013
and 2014, lncludlng Cu buL also a range of componenLs and oLher varlables. locuslng on a seL of
varlables ls [usLlfled because Lhe budgeLary pro[ecLlons depend boLh on Cu and a range of oLher
componenLs, such as consumpLlon for vA1 or household lncomes for lncome Lax. lurLhermore, a
soundly-based forecasL needs Lo be lnLernally conslsLenL ln Lerms of Lhe pro[ecLlons for dlfferenL
lLems, glven Lhe accounLlng relaLlonshlps and economlc llnks beLween dlfferenL varlables. 1he
relevanL seL of forecasLs lncludes Lhe maln expendlLure componenLs of Cu, Lhe balance of
paymenLs, lncomes, Lhe labour markeL and prlces.
10
1he Councll pays parLlcular aLLenLlon Lo Lhose
varlables LhaL have Lhe greaLesL lmpacL on Lhe publlc flnances.
ln addlLlon Lo Lhe quanLlLaLlve aspecLs of Lhe forecasL, Lhe Councll's approach Lo endorsemenL
Lakes accounL of oLher elemenLs, lncludlng Lhe meLhodology used and Lhe soundness of
[udgemenLs lnvolved.
11

As seL ouL ln Lhe Mou, Lhe provlslonal flnal" forecasLs provlded Lo Lhe Councll for endorsemenL do
noL lnclude Lhe lmpacL of speclflc dlscreLlonary Lax and expendlLure measures lncluded ln Lhe

10
1he Mou speclfles 1he seL of key varlables Laken lnLo accounL ln Lhe endorsemenL wlll cover Lhose publlshed ln Lhe
8udgeL and Lhe SLablllLy rogramme and wlll lnclude, lnLer alla: (l) real and nomlnal aggregaLe Cu and Cn changes,
(ll) changes ln ma[or expendlLure componenLs (nomlnal and real), namely, personal consumpLlon of goods and servlces,
gross domesLlc flxed caplLal formaLlon, neL expendlLure by cenLral and local CovernmenL on currenL goods and servlces,
exporLs of goods and servlces, and lmporLs of goods and servlces, (lll) Lhe currenL accounL of Lhe balance of paymenLs,
(lv) facLor lncome and average wage compensaLlon, employmenL and unemploymenL, and (v) PlC lnflaLlon and Lhe
Cu deflaLor".
11
See llAC, 2013a, SecLlon 1.3.
Are mosL-llkely forecasLs conservaLlve"? 1hls depends on Lhe dlsLrlbuLlon of rlsks. lf
downslde rlsks predomlnaLe, Lhe mosL-llkely forecasL ls noL conservaLlve because lL
effecLlvely places no welghL on low probablllLy, hlgh lmpacL evenLs. 8y conLrasL, lf rlsks are
on Lhe upslde, Lhe mosL-llkely forecasL - whlch wlll be lower Lhan Lhe expecLed-value -
could be vlewed as a conservaLlve approach.
1he SLablllLy and CrowLh acL requlres SLablllLy rogrammes Lo be based ...on Lhe mosL
llkely macro-flscal scenarlo or on a more prudenL scenarlo". 1he mosL llkely" forecasLlng
approach embodled ln Lhe Mou effecLlvely rules ouL maklng forecasLs LhaL are dellberaLely
more prudenL Lhan Lhe modal forecasL.
Powever, from Lhe vlewpolnL of seLLlng pollcy, lL ls lmporLanL Lo know Lhe balance of rlsks,
as well as Lhe mosL llkely forecasL as Lhese could affecL Lhe pollcy sLance. lor example, Lhe
8udgeL documenLaLlon lncludes an expllclL sLaLemenL of economlc rlsks. When downslde
rlsks predomlnaLe, pollcymakers mlghL wanL Lo bulld buffers ln Lhe publlc flnances Lhrough
pollcy declslons Lo proLecL agalnsL bad ouLcomes.
8

8udgeL. Moreover, Lhey may be based on an aggregaLe ad[usLmenL amounL LhaL dlffers from Lhe
flnal amounL of ad[usLmenL dependlng on Lhe Llmlng of lnformaLlon avallablllLy. 1hls creaLed (ln Lhe
case of 8oJqet 2014) a dlfference beLween Lhe forecasLs underlylng Lhe 8udgeL, whlch were based
on an ad[usLmenL package of t2.3 bllllon and Lhe forecasLs endorsed by Lhe Councll based on a
LoLal package of t3.1 bllllon. ln general, Lhe dlfferences beLween Lhese forecasLs should be small ln
Lhe absence of slgnlflcanL pollcy changes aL Lhe Llme flnal budgeLary declslons are Laken.
1. 3 . 2 L nuC8 S L ML n1 ML 1 PCu CL CC?
1he Councll's endorseable range ls lnformed by benchmark pro[ecLlons prepared by Lhe Councll's
SecreLarlaL (Lhese are shown ln Annex A). 1hls lnvolves a full-scale forecasLlng exerclse and Lhe
developmenL of a range of forecasLlng Lools.
12
1echnlcal analysls ls complemenLed by Lhe use of
[udgemenL ln lnLerpreLlng and ad[usLlng Lhe ouLpuL from sLaLlsLlcal models.
1hls forecasLlng exerclse and seL of benchmark pro[ecLlons help Lhe Councll Lo analyse relevanL
economlc developmenLs, Lo develop an undersLandlng of key underlylng economlc Lrends, and Lo
galn furLher lnslghL lnLo whaL forecasLs could be consldered as approprlaLe and endorseable. 1he
benchmark pro[ecLlons draw heavlly on Lhe work of Lhe Councll's SecreLarlaL and do noL necessarlly
represenL a collecLlve forecasL by Lhe Councll.
1o ensure LhaL Lhe Councll ls able Lo provlde an lndependenL analysls of, and Lo effecLlvely
challenge Lhe ueparLmenL of llnance forecasLs, Lhe benchmark pro[ecLlons are compleLed befote
Lhe Councll engages ln ln-depLh endorsemenL meeLlngs wlLh Lhe ueparLmenL of llnance.
1he Councll's benchmark pro[ecLlons may dlffer from Lhe forecasLs produced by Lhe ueparLmenL of
llnance. Powever, Lhe forecasLs could sLlll be endorseable elLher because (l) Lhe dlfferences are
sufflclenLly small Lo be wlLhln Lhe endorseable range, or (ll) lf Lhe ueparLmenL of llnance provldes
convlnclng reasons for forecasLs furLher from Lhe benchmark pro[ecLlons. 1hese reasons could
lnclude lncorporaLlng daLa or lnformaLlon LhaL Lhe Councll dld noL have when maklng lLs
benchmark pro[ecLlons, or a sLrong [usLlflcaLlon for dlfferenL [udgemenLs Lo Lhose embodled ln Lhe
benchmark.

12
1hls ls conslsLenL wlLh Lhe requlremenL of Lhe Mou LhaL 1he Councll wlll seek Lo develop and malnLaln Lhe Lechnlcal
capaclLy and analyLlcal experLlse Lo evaluaLe ln deLall macroeconomlc pro[ecLlons for lreland. 1he Councll wlll
communlcaLe regularly as Lo lLs approach Lo Lhe endorsemenL funcLlon, lncludlng Lhe analysls underplnnlng lLs
assessmenLs."
9

1he baslc framework underlylng Lhe benchmark pro[ecLlons ls a sysLem of equaLlons mlrrorlng Lhe
expendlLure slde of Lhe naLlonal accounLs wlLh Cu and Cn derlved uslng a boLLom up" approach
from Lhelr componenLs. ln some cases, Lhese componenLs are ln Lurn derlved from forecasLs of
Lhelr sub-componenLs. lor example, lnvesLmenL ls bullL up from lnvesLmenL ln houslng, oLher
bulldlng and consLrucLlon, and machlnery and equlpmenL. uemand componenLs are llnked Lo
labour markeL varlables, lncomes and Lhe ouLpuL slde of Lhe economy. 1hese llnkages alm Lo
achleve conslsLency across Lhe varlous elemenLs of Lhe forecasL.
Lconomlc pro[ecLlons are condlLlonal on a range of exogenous assumpLlons. 1hese lnclude lnLeresL
raLes, exchange raLes, oll prlces and growLh raLes ouLslde of lreland.
13
1he assumpLlons used ln Lhe
benchmark pro[ecLlons are broadly slmllar Lo Lhose underlylng 8oJqet 2014 and follow sLandard
forecasLlng pracLlces. lor growLh ln lreland's ma[or Lradlng parLners (Luro Area, uk and uS), Lhe
laLesL daLa were Laken based on esLlmaLes from agencles such as Lhe CLCu, Lhe lMl and Lhe
Luropean Commlsslon.
1he benchmark pro[ecLlons are based around a sulLe of models" approach. Clven Lhe uncerLalnLy
around Lhe forecasLs from any slngle model, lL ls prudenL Lo look across a range of forecasLs from
dlfferenL economlc models Lo bulld up a more robusL plcLure. lL ls generally accepLed LhaL Lhe
average across a range of forecasL models ouLperforms and ls more robusL Lhan relylng on a slngle
model (8aLes and Cranger, 1969, SLock and WaLson, 1999). 1he Councll wlll conLlnue Lo develop
Lhls approach.
1he models used lnclude some based on Lhe equaLlons used by Lhe ueparLmenL of llnance and
some developed by Lhe Councll's SecreLarlaL. ln some cases, ueparLmenL of llnance models have
been reflned or ad[usLed. ln conLrasL Lo some models LhaL are esLlmaLed Lo maxlmlse sLaLlsLlcal flL
over Lhe hlsLorlcal sample, Lhe Councll's approach was Lo evaluaLe models by Lhelr forecasLlng
performance. 1hls ls done by esLlmaLlng equaLlons up Lo some pasL daLe and Lhen calculaLlng Lhe
forecasL errors lf Lhose esLlmaLes had been used Lo make forecasLs. 1hls approach more closely
mlrrors whaL forecasLers have Lo do ln real Llme.

13
lor exchange raLes, oll prlces and Lurlbor lnLeresL raLes, Lhe average of Lhe Len days prlor Lo Lhe forecasL exerclse ls
calculaLed and Lhen used as Lhe value LhaL applles over Lhe remalnder of Lhe currenL quarLer. lor Lhe remalnlng forecasL
horlzon, Lurlbor and oll prlce assumpLlons are based on markeL forward raLes. uemand ln lreland's ma[or Lradlng
parLners ls also an exogenous assumpLlon. 1hls ls calculaLed on Lhe basls of Lrade shares over Lhe perlod 1992 Lo 2012
whlch were flxed for Lhe forecasL horlzon. 1rade shares are Lhen comblned wlLh Lhe laLesL forecasLs of lmporL demand
Laken from varlous lnLernaLlonal sources ln order Lo derlve measures of exLernal demand.
10

1he benchmark pro[ecLlons rely heavlly on quarLerly CSC daLa, speclflcally from Lhe Ooottetly
Notloool Accooots and Lhe Ooottetly Notloool noosebolJ 5otvey, boLh ln Lhe esLlmaLlon of models
and forecasLlng. AlLhough quarLerly daLa ln lreland are volaLlle and prone Lo revlslon, Lhe volaLlllLy
ls parL of Lhe dynamlcs of Lhe economy and should noL be lgnored. lurLhermore, undersLandlng Lhe
quarLerly dynamlcs - wlLhln Lhe consLralnLs of Lhe daLa - ls necessary Lo make accuraLe predlcLlons
for annual naLlonal AccounLs varlables. 1he emphasls on quarLerly daLa was a key lnpuL lnLo Lhe
benchmark pro[ecLlons for 2013 (as well as carry-over effecLs lnLo 2014 - see 8ox C).
1hls model-based analysls ls Lhen augmenLed wlLh [udgemenL Lo come Lo Lhe flnal seL of
benchmark pro[ecLlons. 1hls approach ls ln llne wlLh LhaL Laken by Lhe ma[or forecasLlng agencles ln
lreland such as Lhe CenLral 8ank of lreland, Lhe Lconomlc and Soclal 8esearch lnsLlLuLe (LS8l) and
Lhe ueparLmenL of llnance and lnLernaLlonally, by Lhe lMl, CLCu and Luropean Commlsslon.
1he use of [udgemenL ls necessary for Lwo reasons. llrsLly, Lhere are many facLors affecLlng Lhe
economy ln Lhe shorL-Lerm LhaL are noL descrlbed by macroeconomlc models. lor example,
lnvesLmenL ln lreland ls heavlly lnfluenced by alrcrafL purchases. 1he Llmlng of Lhese purchases
reflecLs flrm-speclflc developmenLs ln a small number of lndlvldual companles. 1hese have Lo be
Laken lnLo accounL ouLslde of Lhe normal macroeconomlc framework. Secondly, macroeconomlc
models and Lhe avallable daLa provlde only a parLlal descrlpLlon of Lhe economy LhaL needs Lo be
augmenLed by well-reasoned [udgemenLs Lo generaLe forecasLs LhaL may be more accuraLe. lor
example, Lhe currenL balance sheeL recesslon has many unprecedenLed feaLures LhaL cannoL be
capLured uslng models based on hlsLorlcal daLa.
An lmporLanL addlLlonal lnpuL lnLo Lhe preparaLlon of Lhe benchmark pro[ecLlons lnvolved a round
of dlscusslons wlLh oLher forecasLers, comlng from a wlde range of dlfferenL perspecLlves.
14
1he
purpose of Lhese dlscusslons was Lo geL a range of vlews on lssues forecasLers were deallng wlLh,
boLh daLa-relaLed as well as subsLanLlve economlc maLLers.

14
ln SepLember 2013, Lhe SecreLarlaL had dlscusslons wlLh forecasLers aL Lhe CenLral 8ank, Lhe Luropean Commlsslon,
Lhe LS8l, Lhe lMl, uavy, Coodbody, lnvesLec, Lhe nevln Lconomlc 8esearch lnsLlLuLe and Mr !oe uurkan of unlverslLy
College uublln. 1he SecreLarlaL also meL wlLh Lhe CSC Lo galn furLher lnslghLs lnLo Loplcal lssues and Lo galn more
lnformaLlon on Lhe sLaLlsLlcal LreaLmenL of a number of key varlables.
11

1. 4 LnuC8S L ML n1 Cl 1 PL 8uuC 1 2014 8 C! L C1 l CnS
1he flrsL endorsemenL exerclse by Lhe Councll covered Lhe 8oJqet 2014 forecasLs for 2013 and
2014 and was carrled ouL under Lhe Lerms of Lhe Mou. 1he ueparLmenL of llnance provlded a good
level of cooperaLlon Lo Lhe Councll, lncludlng ln respondlng Lo quesLlons and requesLs for addlLlonal
lnformaLlon.
13

1he Llmellne underlylng Lhe endorsemenL process ls seL ouL ln llgure 1.1.
ll Cu8L 1. 1: 1l MLLl nL lC8 1PL LnuC8SLMLn1 Cl 8uuC1 2014 8C! LC1l CnS
Date
23-24 September
8enchmark pro[ecLlons were flnallsed ln advance of recelvlng
forecasLs for 8oJqet 2014 from Lhe ueparLmenL of llnance.
24 September
1he Councll recelved Lhe prellmlnary seL of provlslonal flnal"
forecasLs from Lhe ueparLmenL ln llne wlLh requlremenLs under Lhe
Mou.
2S September
1hese forecasLs were presenLed by ueparLmenL of llnance sLaff Lo
Lhe Councll's SecreLarlaL explalnlng Lhe underlylng reasonlng and
answerlng clarlfylng quesLlons. 1wo Councll members also
parLlclpaLed ln Lhe meeLlng.
29 September 1he Councll meL Lo dlscuss Lhe ueparLmenL of llnance forecasLs.
30 September
ueparLmenL of llnance sLaff meL wlLh Lhe full Councll and
SecreLarlaL Lo presenL and answer subsLanLlve quesLlons on Lhe
provlslonal flnal" forecasLs. 1hese forecasLs were unchanged from
Lhose provlded Lo Lhe Councll Lhe prevlous week. 1he Councll ralsed
quesLlons on a number of lssues.
lollowlng Lhe meeLlng, Lhe ueparLmenL provlded furLher
clarlflcaLlon on Lhelr forecasL for consumpLlon. 1he Councll
subsequenLly declded LhaL a slgnlflcanL reservaLlon" (as per Lhe
Mou, secLlon 3) remalned over Lhe consumpLlon forecasL.
1 Cctober
As speclfled ln Lhe Mou, Lhe Councll Chalr communlcaLed lLs
slgnlflcanL reservaLlon" Lo ueparLmenL sLaff.
1-3 Cctober
1he ueparLmenL provlded furLher clarlflcaLlon on lLs consumpLlon
forecasL and commlLLed Lo lncludlng lnformaLlon on Lhe poLenLlal
for upward revlslons Lo Ooottetly Notloool Accooots personal
consumpLlon daLa for Lhe flrsL half of 2013 ln Lhe 8udgeL
documenLaLlon.
4 Cctober
1he Chalr of Lhe Councll lssued a leLLer Lo Lhe ueparLmenL of
llnance endorslng Lhe seL of macroeconomlc forecasLs for 2013 and
2014 ln 8oJqet 2014. 1hls leLLer was publlshed on 9 CcLober.

13
1he Councll's SecreLarlaL also meL wlLh ueparLmenLal sLaff early ln Lhe summer Lo dlscuss Lhe maln equaLlons and
daLa used ln Lhelr macroeconomlc forecasLs.
12

As descrlbed earller, Lhe framework and meLhodology for Lhe process were developed over Lhe
summer. 1hls work lncluded Lhe preparaLlon of a seL of benchmark pro[ecLlons LhaL were flnallsed
on 24 SepLember, lncorporaLlng Lhe Ooottetly Notloool Accooots release of 19 SepLember buL
befote recelvlng Lhe prellmlnary seL of forecasLs speclfled ln Lhe Mou from Lhe ueparLmenL of
llnance. 1hese benchmark pro[ecLlons, whlch were noL shared wlLh ueparLmenL of llnance sLaff,
are seL ouL ln Annex A.
lollowlng Lhe recelpL of Lhe ueparLmenL of llnance's prellmlnary forecasLs and a presenLaLlon of
Lhese pro[ecLlons Lo Lhe Councll's SecreLarlaL and some Councll members, Lhe Councll meL Lo
conslder Lhe prellmlnary forecasLs. 1he Councll's examlnaLlon of Lhe forecasLs lncluded comparlng
Lhem Lo Lhe benchmark pro[ecLlons and agalnsL lLs sense of Lhe endorseable range, as well as
assesslng Lhe conslsLency of Lhe overall seL of pro[ecLlons. SubsequenLly, ueparLmenL of llnance
sLaff presenLed Lo Lhe full Councll and SecreLarlaL Lhe provlslonal flnal" forecasLs, whlch were
unchanged from Lhe prellmlnary forecasLs presenLed Lhe week before.
16
1hese forecasLs had
prevlously been shared wlLh MlnlsLers by ueparLmenLal sLaff. 1he Councll quesLloned
ueparLmenLal offlclals, based on lssues ldenLlfled by Lhe Councll ln lLs earller dellberaLlons, and
requesLed some addlLlonal lnformaLlon.
1he overall forecasLs for real Cu growLh for 2013 and 2014 ln Lhe ueparLmenL's provlslonal flnal"
forecasLs were qulLe close Lo Lhe benchmark pro[ecLlons. Powever, as ls evldenL from Annexes A
and 8, Lhe composlLlon of growLh dlffered. ln parLlcular, Lhe benchmark pro[ecLlon for exporLs was
much sLronger, and LhaL for consumpLlon much weaker, compared wlLh Lhe ueparLmenL's
forecasL.
17, 18
Clven Lhe naLure of shorL-Lerm forecasLlng, some dlvergences were Lo be expecLed
and Lhe Councll's endorsemenL meLhodology ls deslgned wlLh LhaL ln mlnd.
ln Lhe case of exporLs, Lhe Councll found explanaLlons provlded by ueparLmenL of llnance sLaff for
a weaker forecasL Lo be plauslble. 1hese explanaLlons lncluded furLher lnformaLlon avallable Lo
ueparLmenL sLaff abouL how Lo lnclude developmenLs ln Lhe cruclal pharmaceuLlcals secLor (Lhe so-

16
1hese forecasLs were subsequenLly presenLed Lo Lhe !olnL ClreachLas CommlLLee on llnance, ubllc LxpendlLure and
8eform on 8 CcLober 2013.
17
1he benchmark pro[ecLlons lnclude exporL growLh of 0.6 per cenL and 4.3 per cenL respecLlvely for 2013 and 2014
compared wlLh -0.6 per cenL and 1.9 per cenL ln Lhe ueparLmenL of llnance's forecasLs.
18
1he benchmark pro[ecLlons lnclude consumpLlon growLh of -0.4 per cenL and 0.4 per cenL respecLlvely for 2013 and
2014 compared wlLh -0.2 per cenL and 1.1 per cenL ln Lhe ueparLmenL of llnance's forecasLs.
13

called paLenL cllff") ln Lhelr exporL pro[ecLlons.
19
ln llghL of Lhese clarlflcaLlons, Lhe Councll vlewed
Lhe exporL growLh forecasLs as wlLhln an approprlaLe range.
1he Councll remalned concerned, however, abouL Lhe lnLernal conslsLency of Lhe provlslonal flnal
forecasLs for personal consumpLlon expendlLure. 1aklng Lhe publlshed CSC quarLerly esLlmaLes of a
decllne ln consumpLlon ln 2012C4 and 2013C1 and modesL growLh ln 2013C2 as glven, Lhe
ueparLmenL's pro[ecLlons for annual growLh ln 2013 appeared Lo lmply lmplauslbly hlgh growLh
raLes ln Lhe Lhlrd and fourLh quarLers of Lhe year. 1he quarLerly proflle lmplled by Laklng Lhe CSC
daLa as glven looked problemaLlc even ln Lhe conLexL of a llkely bounce back ln consumpLlon ln Lhe
second half of 2013 as a resulL of some secLor-speclflc facLors (dlscussed ln SecLlon 1.3.1). 1he
relaLlonshlp beLween annual growLh raLes and quarLerly growLh proflles ls explored ln more deLall
ln 8ox C.

19
uevelopmenLs ln Lhe pharmaceuLlcals secLor were already facLored lnLo Lhe benchmark pro[ecLlons buL ln a dlfferenL
way.
8Ck C: ANNUAL GD GkCW1n AND CAkkCVLk LIILC1S
1he 8udgeL lncludes forecasLs for annual Cu and oLher varlables, boLh ln Lerms of Lhelr
level and Lhe growLh raLe beLween calendar years. ueparLmenL of llnance forecasLs are
made for Lhese annual aggregaLes.
1hls ls a sLandard approach. Powever, lL can lead Lo growLh pro[ecLlons LhaL are unlnLulLlve
or appear mlsleadlng glven Lhe lrregular (seasonally-ad[usLed) paLLern of quarLerly growLh ln
Lhe economy measured ln Lhe naLlonal AccounLs. lurLhermore, an annual growLh raLe
covers developmenLs over 8 quarLers and can Lherefore glve a raLher backward-looklng
plcLure of growLh around Lurnlng polnLs. 1herefore, care ls needed ln lnLerpreLlng annual
growLh forecasLs as Lhese may noL closely maLch Lhe underlylng paLLern ln Lhe quarLerly
daLa.
1aklng a hypoLheLlcal example, Lhe (seasonally-ad[usLed) aggregaLe ln llgure C1 has an
lrregular paLLern of growLh. Powever, Lhe aggregaLe clearly reaches a Lrough aL Lhe
beglnnlng of year L+1 and expands conLlnuously LhereafLer Lo reach a hlgher level by Lhe end
of L+1 Lhan aL Lhe end of perlod L. Powever, Lhe annual average level over Lhe four quarLers
of year L+1 ls acLually lowet Lhan lL was ln perlod L and Lherefore Lhe annual growLh raLe
reglsLers a coottoctloo beLween L+1 and L, desplLe Lhe recovery LhaL ls occurrlng durlng LhaL
year. 1hls ls an example of how annual growLh raLes may presenL a mlsleadlng plcLure of Lhe
underlylng quarLerly developmenLs.
14

AL Lhe same Llme, Lhe lncrease ln Lhe level of Lhe aggregaLe durlng Lhe course of year L+1
means LhaL, even lf Lhe aggregaLe were Lo sLay aL LhaL level lL reaches by Lhe end of L+1
LhroughouL L+2, Lhere would be a sLrong annual growLh raLe reglsLered ln L+2 even wlLh no
acLual growLh durlng Lhe course of LhaL year. 1hls ls known as Lhe carryover" effecL.
lor Lhe example above, Lhese effecLs are shown ln 1able C1.1hls shows Lhe negaLlve growLh
measured on an annual growLh basls ln L+1 and Lhe very sLrong growLh ln L+2, desplLe only
modesL assumed quarLerly lmprovemenLs durlng LhaL year. 1he Lable also shows growLh
raLes measured as Lhe change beLween Lhe fourLh quarLer of one year and Lhe fourLh
quarLer of Lhe precedlng year. 1hls can glve a clearer plcLure of how much Lhe economy has
grown durlng Lhe course of Lhe year.
1A8LL C1: P?C1PL1l CAL LxAMLL Cl C8CW1P Anu CA88?CvL8S
Change
t t+1 t+2
Annua| Growth -0.3 -0.3 2.2
Cf wh|ch carryover 0.3 1.4
4]4 Growth 0.8 0.4 1.2

An lmpllcaLlon of carryover effecLs ls LhaL annual growLh raLes are very senslLlve Lo growLh
raLes ln Lhe early quarLers of Lhe year - varylng one-for-one wlLh growLh ln Lhe flrsL quarLer
(oLher Lhlngs equal) - buL dependlng much less on developmenLs Lowards Lhe end of Lhe
year (varylng one-for-four wlLh growLh ln Lhe fourLh quarLer). Powever, Lhe carryover for Lhe
followlng year ls sLrongly affecLed by growLh ln Lhe flnal quarLers of Lhe prevlous year.
lL ls lmporLanL for forecasLs Lo reflecL Lhese underlylng developmenLs ln quarLerly Lerms ln
Lhe formulaLlon of annual growLh pro[ecLlons. CLherwlse, Lhere ls a rlsk LhaL annual growLh
raLes LhaL seem reasonable acLually lmply quarLerly growLh proflles LhaL are lmplauslble,
suggesLlng LhaL Lhe annual growLh forecasLs are ln facL unllkely. Whlle a loL of Lhe varlaLlon
ln early CSC esLlmaLes of Lhe quarLerly proflle may be revlsed away, much of Lhe volaLlllLy ln
expendlLure from quarLer-Lo-quarLer ls a real feaLure of a volaLlle economy such as lreland's
and needs Lo be Laken lnLo accounL for annual forecasLs Lo be accuraLe.
98
99
100
101
102
103
104
L L+1 L+2
l
n
d
e
x

L

C
1

=

1
0
0

ll Cu8L C1: An LCCnCMl C ACC8LCA1L Wl 1P l 88LCuLA8 uA1A
uaLa Annual average
13

1he Councll's slgnlflcanL reservaLlon" on Lhls aspecL was subsequenLly communlcaLed Lo
ueparLmenL sLaff on an lnformal basls, as seL ouL ln Lhe Mou. ln response, ueparLmenL offlclals
agreed Lo explaln, as parL of Lhe 8oJqet 2014 documenLaLlon, Lhelr raLlonale for Lhe quarLerly
proflle lmplled by Lhelr annual consumpLlon forecasLs, and ln parLlcular Lo reference Lhe poLenLlal
for upward revlslons Lo consumpLlon daLa for Lhe flrsL half of 2013. As a resulL, Lhe 8oJqet 2014
cooomlc ooJ llscol Ootlook lncluded Lhe followlng sLaLemenL:
1he quarLerly proflle for personal consumpLlon expendlLure has been somewhaL erraLlc
over Lhe course of Lhls year, ln parL due Lo a sLrucLural change ln Lhe vehlcle reglsLraLlon
sysLem whlch has had Lhe effecL of smooLhlng Lhe purchase of vehlcles over Lhe course of
Lhe year. lnlLlal esLlmaLes for consumer spendlng for Lhe flrsL quarLer were subsequenLly
revlsed upwards, and Lhe posslblllLy of furLher revlslons cannoL be excluded, parLlcularly
ln an envlronmenL ln whlch hlgh-frequency daLa (core reLall sales) polnL Lo a relaLlvely
sLrong pace of expanslon ln Lhe Lhlrd quarLer.
20

An upward revlslon ln Lhe CSC consumpLlon daLa for Lhe flrsL half of 2013 - a by no means unllkely
posslblllLy glven Lhe normal volaLlllLy and frequency of revlslons Lo such daLa - would reduce Lhe
lmplled growLh needed ln Lhe second half of Lhe year Lo meeL Lhe ueparLmenL's forecasL for
consumpLlon growLh ln 2013. Cn Lhls basls, Lhe Councll concluded LhaL lLs concerns had been
adequaLely addressed and a leLLer endorslng Lhe seL of forecasLs ln 8oJqet 2014 was senL by Lhe
Chalr of Lhe Councll Lo Lhe SecreLary Ceneral of Lhe ueparLmenL of llnance on 4 CcLober 2013.
1. 3 An AS S L S S ML n1 Cl lC8 L C AS 1 S CCn1 Al nL u l n 8uuC 1 2014
1. 3 . 1 MAC 8 CL C CnCMl C l C8 L C AS 1 S l n 8uuC 1 2014
1he provlslonal flnal" macroeconomlc forecasLs underlylng 8oJqet 2014 were endorsed by Lhe
Councll (see Annex 8). 1he macroeconomlc ouLlook was, however, revlsed beLween Lhe
endorsemenL and Lhe publlcaLlon of 8oJqet 2014, reflecLlng a lower level of consolldaLlon ln Lhe
8udgeL.
21
1he ueparLmenL ls expecLlng real Cu growLh of 0.2 per cenL ln 2013 and 2 per cenL ln
2014 (1able 1.1).

20
8oJqet 2014, page C.6.
21
1he provlslonal flnal forecasLs endorsed by Lhe Councll assumed t3.1 bllllon ln consolldaLlon measures for 2014. 1he
acLual consolldaLlon was t2.3 bllllon.
16

1A8LL 1. 1: 8uuC1 2014 MAC8CLCCnCMl C lC8LCAS1S
change un|ess
otherw|se stated
2012 2013 2014 201S 2016
kea| GD 0.2 0.2 2.0 2.3 2.8
kea| GN 1.8 1.0 1.7 1.7 2.1
Consumpt|on -0.3 -0.2 1.8 1.2 1.1
Investment -1.0 4.9 6.8 3.9 3.1
Government -3.7 -0.9 -1.9 -1.3 0.2
Lxports 1.6 -0.6 1.9 2.7 4.2
Imports 0.0 -0.4 1.3 2.1 3.3
Current Account
( of GD)
4.4 4.4 4.0 3.8 3.7
Lmp|oyment -0.7 1.6 1.3 1.3 1.3
Unemp|oyment
kate ()
14.7 13.3 12.4 11.8 11.4
Inf|at|on (nIC) 2.0 0.7 1.2 2.0 2.0
Nom|na| GD
( b||||ons)
164.0 163.9 170.6 177.0 184.7

1he growLh ouLLurn for 2013 ls llkely Lo be depressed by a number of speclflc facLors, lncludlng Lhe
paLenL cllff" ln Lhe pharmaceuLlcal secLor reduclng exporLs, and one-off facLors LhaL reduced
domesLlc demand ln Lhe flrsL half of Lhe year.
22
1hls comes agalnsL Lhe background of on-golng
balance sheeL repalr and budgeLary consolldaLlon, as well as anaemlc demand ln some of lreland's
maln Lradlng parLners. Powever, Lhese headwlnds are expecLed Lo ease gradually over Lhe forecasL
horlzon enabllng a plck-up ln neL exporLs and domesLlc demand lnLo 2014, boosLed by Lhe
unwlndlng of some secLor speclflc facLors affecLlng 2013.
ersonal consumpLlon expendlLure growLh ls expecLed Lo conLracL ln 2013. 1hls reflecLs a weak
ouLLurn for Lhe flrsL half of Lhe year, ln parL due Lo changes ln Lhe car reglsLraLlon sysLem LhaL
depressed sales. 1hls lmpacL should unwlnd ln Lhe second half of Lhe year, more recenL lndlcaLors,

22
Ooottetly Notloool Accooots daLa for Lhe flrsL half of 2013 were weak wlLh real Cu down 1.1 per cenL year-on-year.
1he volume of exporLs of goods and servlces decllned by 1.3 per cenL ln Lhe flrsL half of 2013 (Lwlce Lhe raLe of decllne
of lmporLs) wlLh personal consumpLlon expendlLure down by 1.2 per cenL over Lhe same perlod.
17

such as Lhe reLall sales lndex (llgure 1.2) are conslsLenL wlLh a plck-up ln consumpLlon spendlng.
23

lor 2014, poslLlve consumpLlon growLh ls envlsaged helped ln parL by sLronger real dlsposable
lncomes. Whlle hlgh levels of debL and flscal consolldaLlon wlll conLlnue Lo welgh on consumpLlon,
Lhe lmproved ouLlook for Lhe labour markeL (and dlsposable lncomes ln Lurn) should encourage
spendlng. 1he personal savlngs raLlo ls also expecLed Lo decllne as confldence lmproves.
ll Cu8L 1. 2: 8L1Al L SALLS l nuLx

lnvesLmenL spendlng ls expecLed Lo grow aL a healLhy raLe ln 2013 and Lo acceleraLe ln 2014. uaLa
for Lhe flrsL half of Lhe year polnL Lo a sLrong underlylng recovery ln mosL componenLs of
lnvesLmenL, alLhough very weak alrcrafL purchases kepL overall growLh subdued (llgure 1.3).
24, 23

CuLpuL ln Lhe consLrucLlon secLor appears Lo be sLrengLhenlng, alLhough overall houslng and
consLrucLlon lnvesLmenL conLlnues Lo be aL very low levels and accounLs for a much smaller share
of lnvesLmenL Lhan durlng Lhe pre-crlsls perlod. 1he poslLlve Lrends ln lnvesLmenL, lncludlng
favourable lndlcaLlons on forelgn dlrecL lnvesLmenL lnflows, suggesL sLronger growLh ln caplLal
formaLlon ln 2014.
CovernmenL spendlng ls expecLed Lo conLracL by 0.9 per cenL ln 2013 and by 1.9 per cenL ln 2014,
parLly reflecLlng Lhe effecL of currenL and pasL consolldaLlon measures. 1he overall level of

23
8eLall sales daLa Lo end-SepLember show a 2.3 per cenL annual rlse ln Lhe volume of LoLal reLall sales ln Lhe Lhlrd
quarLer of Lhe year. 8eLall sales excludlng moLor Lrades were up 0.6 per cenL over Lhe same perlod.
24
Lxcludlng LransporL equlpmenL, lnvesLmenL ln volume Lerms was up 9.1 per cenL ln Lhe flrsL half of Lhe year. 8ulldlng
and consLrucLlon lnvesLmenL grew by 8.3 per cenL wlLh machlnery and equlpmenL (excludlng LransporL) up 9.8 per cenL.
23
Company flnanclal sLaLemenLs lndlcaLe LhaL slgnlflcanL fuLure alrcrafL purchases are planned and lL ls assumed LhaL
some dellverles wlll be Laken ln Lhe second half of 2013.
80
83
90
93
100
103
110
113
120
2
0
0
3
M
0
1

2
0
0
3
M
0
3

2
0
0
3
M
0
9

2
0
0
6
M
0
1

2
0
0
6
M
0
3

2
0
0
6
M
0
9

2
0
0
7
M
0
1

2
0
0
7
M
0
3

2
0
0
7
M
0
9

2
0
0
8
M
0
1

2
0
0
8
M
0
3

2
0
0
8
M
0
9

2
0
0
9
M
0
1

2
0
0
9
M
0
3

2
0
0
9
M
0
9

2
0
1
0
M
0
1

2
0
1
0
M
0
3

2
0
1
0
M
0
9

2
0
1
1
M
0
1

2
0
1
1
M
0
3

2
0
1
1
M
0
9

2
0
1
2
M
0
1

2
0
1
2
M
0
3

2
0
1
2
M
0
9

2
0
1
3
M
0
1

2
0
1
3
M
0
3

2
0
1
3
M
0
9

S
e
a
s
o
n
a
l
l
y

A
d
[
u
s
L
e
d

l
n
d
e
x
:

2
0
0
3

=

1
0
0

8eLall Sales
8eLall Sales excl MoLor 1rades
18

consolldaLlon ln 8oJqet 2014 was reduced by t0.6 bllllon Lo t2.3 bllllon relaLlve Lo plans prlor Lo
Lhe 8udgeL. 1hls ls expecLed Lo exerL a small poslLlve effecL on Cu growLh.
26

LxporLs of goods and servlces were very weak ln Lhe flrsL half of Lhe year ln large parL due Lo Lhe
effecLs of Lhe paLenL cllff". 1hls ls occurrlng as Lhe paLenLs on a number of key domesLlcally
produced pharmaceuLlcals producLs explre, leadlng Lo a reducLlon ln Lhe value of goods exporLs.
harmaceuLlcal exporLs accounL for around half of lrlsh manufacLured goods exporLs. 1he preclse
speed and exLenL of Lhe paLenL cllff effecLs are noL fully known, alLhough Lhe ueparLmenL of
llnance has provlded some deLalled analysls.
27
1hese developmenLs have made lL more dlfflculL Lo
forecasL exporLs and have conLrlbuLed Lo a breakdown ln Lhe hlsLorlc relaLlonshlp beLween exporLs
and Lhelr maln deLermlnanLs. As a consequence, goods exporLs are llkely Lo be affecLed slgnlflcanLly
over Lhe nexL few years. ln conLrasL, servlces exporLs (whlch now accounL for around half of LoLal
exporLs) are expecLed Lo remaln robusL. Cver Lhe forecasL horlzon, LoLal exporLs should beneflL
from a sLrengLhenlng ln demand ln lreland's ma[or Lradlng parLners, domesLlc compeLlLlveness
lmprovemenLs and Lhe reslllence of Lhe servlces secLor.

26
1hls can be seen from Lhe facL LhaL Cu growLh ln 2014 was revlsed up from 1.8 per cenL Lo 2 per cenL beLween Lhe
forecasLs endorsed by Lhe Councll (whlch assumed consolldaLlon of t3.1 bllllon) and 8oJqet 2014.
27
See LnrlghL and ualLon (2013), 1be lmpoct of tbe loteot cllff oo lbotmo-cbem Ootpot lo ltelooJ, avallable from:
hLLp://www.flnance.gov.le/vlewdoc.asp?uoclu=7830&CaLlu=43&SLarLuaLe=1+!anuary+2013
-30
-40
-30
-20
-10
0
10
20
30
2
0
0
7
C
1

2
0
0
7
C
2

2
0
0
7
C
3

2
0
0
7
C
4

2
0
0
8
C
1

2
0
0
8
C
2

2
0
0
8
C
3

2
0
0
8
C
4

2
0
0
9
C
1

2
0
0
9
C
2

2
0
0
9
C
3

2
0
0
9
C
4

2
0
1
0
C
1

2
0
1
0
C
2

2
0
1
0
C
3

2
0
1
0
C
4

2
0
1
1
C
1

2
0
1
1
C
2

2
0
1
1
C
3

2
0
1
1
C
4

2
0
1
2
C
1

2
0
1
2
C
2

2
0
1
2
C
3

2
0
1
2
C
4

2
0
1
3
C
1

2
0
1
3
C
2

ll Cu8L 1. 3: AnnuAL CPAnCLS l n l nvLS1MLn1
Cverall lnvesLmenL
underlylng Machlnery & LqulpmenL
8ulldlng & ConsLrucLlon
Note. underlylng Machlnery & LqulpmenL lnvesLmenL excludes LransporL equlpmenL.
19

lmporLs are pro[ecLed Lo conLracL ln 2013 before growlng ln 2014, reflecLlng Lhe more poslLlve
ouLlook for exporLs and personal consumpLlon. Cverall, neL exporLs are expecLed Lo conLrlbuLe
negaLlvely Lo growLh ln 2013, before Lurnlng poslLlve ln 2014 (llgure 1.4).
ll Cu8L 1. 4: CCn18l 8u1l CnS 1C C8CW1P
28

Labour markeL daLa have been poslLlve over Lhe pasL year, desplLe Lhe relaLlve weakness of Cu
growLh. Lconomy-wlde employmenL grew by 1.3 per cenL ln Lhe flrsL half of Lhe year accordlng Lo
Lhe Ooottetly Notloool noosebolJ 5otvey (CnPS). LmploymenL lncreased ln 9 of Lhe 14 secLors ln
Lhe second quarLer of 2013, relaLlve Lo Lhe prevlous year. More recenL daLa from Lhe llve reglsLer
show a conLlnued decllne ln Lhe unemploymenL raLe.
29
1he poslLlve employmenL developmenLs
slgnal LhaL flrms are becomlng more opLlmlsLlc ln Lerms of demand prospecLs. ln conLrasL, daLa
from Lhe survey on otoloqs noots ooJ mploymeot costs (LPLCS) palnLs a less poslLlve plcLure
wlLh very weak earnlngs growLh (alLhough lnflaLlon remalns subdued). 1hls polnLs Lo Lhe need for
cauLlon ln assesslng employmenL prospecLs.
1aken LogeLher, Lhe sLrengLh of employmenL relaLlve Lo ouLpuL growLh lmplles an unusually large
decllne ln measured producLlvlLy ln 2013 (llgure 1.3). 1hls may parLly reflecL Lhe unusual decllne ln
acLlvlLy ln pharmaceuLlcals, Lyplcally a hlgh value-added secLor wlLh low employmenL.

28
lorecasL years based on Lhe ouLlook ln 8oJqet 2014.
29
ln Lhe Lhree-monLh perlod Lo end-CcLober, Lhe number of persons on Lhe reglsLer decllned by 2.2 per cenL quarLer-
on-quarLer. ln CcLober, Lhe sLandardlsed unemploymenL raLe was 13.2 per cenL (down from 14.3 per cenL ln CcLober
2012).
-13
-10
-3
0
3
10
2003 2006 2007 2008 2009 2010 2011 2012 2013 2014

uomesLlc uemand ex sLocks neL LxporLs
8esldual Cu
20

lor 2013 and 2016, Lhe forecasLs ln 8oJqet 2014 envlsage average annual Cu growLh of 2.6 per
cenL. 1hese pro[ecLlons were noL sub[ecL Lo endorsemenL by Lhe Councll. 1he forecasLs essenLlally
repeaL Lhe ouLlook presenLed ln mosL Lwo- Lo Lhree-year ahead forecasLs for Lhe lrlsh economy.
More favourable exLernal demand condlLlons and a susLalned lmprovemenL ln domesLlc
expendlLure are Lhe maln underlylng facLors.
An assessmenL of lreland's growLh prospecLs musL balance Lhe recenL poslLlve slgnals of recovery -
employmenL growLh, sLablllsaLlon ln reLall sales, underlylng lnvesLmenL growLh - agalnsL conLlnulng
concerns abouL Lhe perslsLence of Lhe balance-sheeL recesslon" (8ox u). 1he unpredlcLable
dynamlcs of a balance-sheeL recesslon means LhaL Lhere remaln slgnlflcanL rlsks around currenL
pro[ecLlons for Lhe economy, as evldenced by a conLlnued paLLern of downward revlslons Lo
growLh forecasLs (see llAC, 2012a, 2012b, and 2013a).

-10
-8
-6
-4
-2
0
2
4
6
8
2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
3

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

2
0
1
4

ll Cu8L 1. 3: LCCnCM?-Wl uL 8CuuC1l l v1? Anu LMLC?MLn1 C8CW1P
roducLlvlLy
LmploymenL
21

30
8elnharL and 8ogoff (2009) documenL Lhe long hlsLory of weak growLh performance followlng flnanclal crlses. lMl
(2013) examlnes Lhe adverse lnLeracLlons beLween hlgh levels of debL ln Lhe CovernmenL, flnanclal and non-flnanclal
prlvaLe secLors of Lhe economy.
31
See Zoll (2013) for an examlnaLlon of Lhe llnks beLween soverelgn rlsk and Lhe fundlng cosLs faced by lLallan banks
durlng Lhe crlsls.
32
!orda et ol. (2013) examlne how Lhe adverse lmpacLs of Lhe credlL-drlven boom-busL cycle are condlLloned by
CovernmenL debL levels ln Lhe afLermaLh of a flnanclal crlsls.
33
See, e.g., 8runnermeler et ol. (2011).
34
lnflaLlon ofLen helped Lo lower Lhe real burden of household and buslness debL ln pasL flnanclal crlses. lnflaLlon ln
lreland and across Lhe Luro Area has remalned exLremely low, alLhough perslsLenL deflaLlon has been avolded.
33
CSC, lnsLlLuLlonal SecLor AccounLs measure.
8Ck D: 1nL DNAMI CS CI 8ALANCL SnLL1 kLCLSSI CNS
1hls box revlews Lhe underlylng dynamlcs of lreland's posL-crlsls balance sheeL recesslon.
1hls remalns a slgnlflcanL downslde rlsk Lo Lhe currenL macroeconomlc forecasLs.
1here are a number of adverse feedback loops LhaL Lyplfy a posL-crlsls balance sheeL
recesslon (llgure u1).
30
SLressed balance sheeLs ln Lhe CovernmenL, flnanclal and non-
flnanclal secLors Lend Lo lnLeracL ln ways LhaL slow posL-crlsls growLh. SLarLlng wlLh Lhe
CovernmenL secLor, lreland's gross debL as a share of Cu rose from abouL 23 per cenL aL
Lhe end of Lhe boom Lo close Lo 123 per cenL Loday. A slgnlflcanL proporLlon of Lhls lncrease
was due Lo Lhe dlrecL cosLs of coverlng losses of Lhe banklng sysLem, wlLh Lhe remalnder due
Lo Lhe sharp rlse ln Lhe deflclL as Lhe economy conLracLed and properLy-relaLed revenues
collapsed. 1hese debL and deflclL developmenLs - LogeLher wlLh uncerLalnLy abouL fuLure
prospecLs - led Lo a loss of Lhe CovernmenL's markeL borrowlng capaclLy, whlch ln Lurn fed
back Lo Lhe banklng sysLem (Lhrough losL credlblllLy of llablllLy guaranLees, Lhe credlblllLy of
caplLal backsLops, and dlrecL losses on CovernmenL bonds) and also Lo Lhe real economy
(Lhrough Lhe need for pro-cycllcal reLrenchmenL and helghLened uncerLalnLy).
31, 32
1he Lwo-
way lnLeracLlon beLween Lhe CovernmenL and Lhe banks ls someLlmes referred Lo as Lhe
dlabollc loop".
33

A feaLure of a balance-sheeL recesslon ls LhaL households and buslnesses aLLempL Lo repalr
Lhelr balance sheeLs by curLalllng spendlng, reduclng debL and selllng asseLs (koo, 2009).
Whlle Lhese acLlons mlghL be raLlonal aL Lhe lndlvldual level, Lhey can lead Lo a cascade of
falllng lncomes and asseL prlces, worsenlng Lhe lncomes and balance sheeLs of oLher
buslnesses and households ln Lhe economy. 1he forces of reLrenchmenL are helghLened by
Lhe effecLs of uncerLalnLy ln Lhe face of Lhe unpredlcLable dynamlcs of Lhe recesslon, and
also by Lhe facL LhaL lmporLanL Lradlng parLners may be slmulLaneously sufferlng slmllar
problems.
34

llgure u2 shows Lhe large rlse ln Lhe gross savlng raLe durlng Lhe crlsls, alLhough Lhere are
recenL slgns LhaL Lhe raLe has fallen back.
33
llgure u3 shows Lhe rapld bulld-up of household
debL prlor Lo Lhe crlsls. 1he nomlnal value of household debL has been subsLanLlally reduced
ln recenL years, ln parL because many households remaln credlL consLralned. Powever, debL
has fallen only sllghLly relaLlve Lo dlsposable lncome glven Lhe splllovers from household-
22

36
See lMl 2012 for an examlnaLlon of how Lhe balance-sheeL recesslon has affecLed Lhe consumpLlon of lrlsh
households. See Mlan et ol. (2013) for counLy-level evldence from Lhe unlLed SLaLes on how marglnal propenslLles Lo
consume are affecLed by household-balance-sheeL healLh.
level balance-sheeL repalr Lo domesLlc demand.
36

A cenLral feaLure of lreland's balance-sheeL recesslon has been Lhe lmpalrmenL of balance
sheeLs ln Lhe banklng sysLem. A Lwo-way poslLlve lnLeracLlon beLween credlL and properLy
prlces fuelled Lhe lnlLlal prlce and consLrucLlon bubbles. ln Lhe wake of Lhe bursLlng of Lhose
bubbles, Lhls lnLeracLlon has worked ln reverse. Whlle Lhe lmpalrmenL of bank balance
sheeLs ls noL Lhe only conLrlbuLor Lo weak credlL growLh - oLher facLors are Lhe lmpalred
balance sheeLs of poLenLlal borrowers and weak credlL demand - Lhere ls evldence LhaL
banks across Lhe Luro Area have LlghLened lendlng sLandards and ralsed lnLeresL marglns as
Lhey Lhemselves aLLempL Lo deleverage and lmprove operaLlng lncome ln Lhe face of
0
2
4
6
8
10
12
14
16
18
2002C1 2004C1 2006C1 2008C1 2010C1 2012C1

o
f

u
l
s
p
o
s
a
b
l
e

l
n
c
o
m
e

ll Cu8L u2: C8CSS SAvl nC 8A1L, 2002C1 1C 2013C2
Cross Savlng 8aLe
Cross Savlng 8aLe (lour-CuarLer Movlng Average)
5ootce. CSC.
23

37
1here ls a large llLeraLure ln macroeconomlcs LhaL sLudles Lhe effecLs of credlL avallablllLy on buslness-cycle dynamlcs.
1he credlL-channel of shock Lransmlsslon focuses on Lhe way LhaL shocks are ampllfled Lhrough flnanclal-acceleraLor"
effecLs, as balance sheeLs become lmpalred and credlL raLlonlng lncreases (see, e.g., 8ernanke et ol.1994, 8ernanke and
CerLler, 1993).
uncerLaln caplLal poslLlons and fundlng condlLlons.
llgure u4 shows Lhe rapld pre-crlsls growLh and Lhen conLracLlon ln Lhe sLock of credlL
exLended Lo households and buslnesses.
37
A slgnlflcanL parL of Lhe conLracLlon reflecLs Lhe
paylng down of loans as parL of Lhe balance-sheeL repalr process. Concerned abouL rlsks Lo
solvency, buslnesses may forgo proflLable lnvesLmenL opporLunlLles, lnsLead chooslng Lo pay
down debL and bulld llquldlLy reserves.

ln Lerms of supporLlng domesLlc demand growLh, lL ls lmporLanL LhaL new lendlng conLlnues
Lo Lake place. llgure u3 shows Lhe recenL evoluLlon ln gross new lendlng Lo Lhe non-
flnanclal/non-properLy SML secLor. 1hls lendlng has noL yeL shown slgnlflcanL slgns of
recovery.
0
30
100
130
200
230
0
30
100
130
200
230
2002C4 2004C4 2006C4 2008C4 2010C4 2012C4
L
o
a
n
s

C
u
L
s
L
a
n
d
l
n
g
,

t

b
l
l
l
l
o
n
s

o
f

u
l
s
p
o
s
a
b
l
e

l
n
c
o
m
e

ll Cu8L u3: PCuSLPCLu LCAnS Cu1S1Anul nC
Loans CuLsLandlng (Lnd of CuarLer), 8lghL Scale
Loans as of ulsposable lncome, LefL Scale
Note. ulsposable lncome equals sum over lasL four quaLers.
5ootces. CenLral 8ank of lreland (Loans), CenLral SLaLlsLlcs Cfflce (ulsposable lncome).
-10
0
10
20
30
40
2004 2003 2006 2007 2008 2009 2010 2011 2012 2013

C
h
a
n
g
e

ll Cu8L u4: C8CW1P 8A1LS l n C8Lul 1 1C 1PL 8l vA1L SLC1C8,
!AnuA8? 2004 1C AuCuS1 2013, L8CLn1ACL CPAnCL l8CM
SAML MCn1P l n 8Lvl CuS ?LA8
non-llnanclal 8uslnesses
Pouseholds
5ootce. CenLral 8ank of lreland.
24

1. 3 . 2 8uu C 1 2014 lC8 L C AS 1 S CCM A8 L u Wl 1 P C1 PL 8 ACL nC l L S
1he 8oJqet 2014 forecasLs are generally ln llne wlLh Lhe broad consensus among Lhe forecasLlng
communlLy LhaL Lhe economy wlll grow modesLly Lhls year buL LhaL Cu growLh wlll plck up ln 2014
(Annex C). MosL agencles foresee growLh of abouL 0.3 per cenL ln 2013 wlLh growLh of
approxlmaLely 2 per cenL forecasL for 2014. LxcepLlons lnclude Lhe LS8l who foresee real Cu
growLh of 2.6 per cenL ln 2014 wlLh Lhe Luropean Commlsslon expecLlng growLh of 1.7 per cenL.
As noLed ln prevlous llscol Assessmeot kepotts, forecasL agencles have conslsLenLly revlsed down
forecasLs over Llme. 1hls could reflecL an underesLlmaLlon of downward pressures creaLed by Lhe
balance sheeL recesslon as well as weaker Lhan expecLed lnLernaLlonal growLh ouLLurns. 1hls
paLLern has conLlnued durlng Lhe second half of 2013 wlLh downward revlslons Lo growLh
pro[ecLlons. ln llgure 1.6, currenL esLlmaLes of growLh ln 2013 by Lhe maln forecasLlng agencles are
shown relaLlve Lo forecasLs made aL Lhe end of 2011/beglnnlng of 2012.

SeL agalnsL Lhese adverse dynamlcs, sLablllslng forces should evenLually galn momenLum, as
balance sheeLs are repalred, Lhe sLock of posLponed spendlng lncreases, llquldlLy LargeLs are
reached and fears abouL Lhe fuLure gradually recede. 1he resLoraLlon of Lhe CovernmenL's
own credlLworLhlness ls llkely Lo be a necessary sLablllslng force, helplng Lo underpln
confldence ln Lhe banklng sysLem, and lessenlng fears LhaL lL wlll be unable Lo effecLlvely
phase requlred flscal ad[usLmenLs over Llme.
383
312
437
730
363
327
340
379
407
438
448
677
464
413
0
100
200
300
400
300
600
700
800
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
t

m
l
l
l
l
o
n
s

ll Cu8L u3: nLW C8Lul 1 AuvAnCLu 1C nCn-
ll nAnCl AL/ nCn- 8CL81? l 8l SP SMLS, MA8CP 2010 1C
! unL 2013
Note. Cross new lendlng ls Lhe amounL of new credlL faclllLles drawn-down durlng Lhe quarLer
by SML counLerparLles, l.e. where Lhls credlL faclllLy was noL parL of Lhe ouLsLandlng amounL
of credlL advanced aL Lhe end of Lhe prevlous quarLer. Cross new lendlng ls deflned Lo
exclude renegoLlaLlons or resLrucLurlng of exlsLlng loans.
5ootce. CenLral 8ank of lreland.
23

1. 6 unCL 81 Al n1 ? Su88 Cunul nC lC8L C AS 1 S
lrlsh macroeconomlc forecasLs are Lhe sub[ecL of conslderable uncerLalnLy. 1hls parLly reflecLs Lhe
lnherenL volaLlllLy ln Lhe economy, Lhe unknown lmpacL of Lhe balance sheeL recesslon as well as
oLher domesLlc and global flnanclal rlsks. 1he presence of slgnlflcanL one-off facLors affecLlng
consumpLlon and lnvesLmenL ln 2013, as well as Lhe paLenL cllff", add Lo Lhese uncerLalnLles.
8oJqet 2014 reporLs on a number of shorL- and medlum-Lerm macroeconomlc rlsks. lL noLes LhaL
...rlsks Lo Lhe cenLral forecasL emanaLe from boLh exLernal and lnLernal sources, and appear Lo be
LllLed Lo Lhe downslde".
38
1hls clear sLaLemenL of Lhe overall balance of rlsks ls welcome. lL
lmproves Lransparency and communlcaLlon around Lhe forecasLs. 1he downslde rlsks lnclude Lhe
fraglllLy of Lhe emerglng recovery and rlsks Lo consumpLlon from hlgh levels of debL. upslde rlsks
lnclude a sLronger rebound ln exporL demand and a more pronounced recovery ln domesLlc
demand. 1he rlsk LhaL Lhe negaLlve effecL on exporLs from Lhe pharmaceuLlcals secLor could be
greaLer Lhan anLlclpaLed ls also noLed.
1he Councll lLself assesses LhaL rlsks remaln LllLed Lo Lhe downslde, alLhough Lhe poLenLlal for
forecasL errors ln elLher dlrecLlon around Lurnlng polnLs ls hlgh and upslde rlsks should noL be
overlooked. An lmporLanL source of rlsks ls Lhe posslble re-lnLenslflcaLlon of flnanclal sLablllLy

38
Clven LhaL Lhe 8udgeL forecasLs are on a mosL llkely" basls (see 8ox 8), Lhls suggesLs LhaL lL ls more llkely Lhan noL
LhaL Lhe macroeconomlc ouLLurns wlll be weaker Lhan Lhe pro[ecLlons lf sLandard assumpLlons abouL Lhe rlsk
dlsLrlbuLlons are applled. (1haL ls, Lhe expecLed value of Lhe macroeconomlc varlables would be lower Lhan Lhe 8oJqet
2014 mosL llkely pro[ecLlons).
0.0
0.3
1.0
1.3
2.0
2.3
3.0
C8l LS8l lMl LC u/l CLCu

ll Cu8L 1. 6: lC8LCAS1 lC8 8LAL Cu C8CW1P l n 2013
lorecasL end-2011/sLarL 2012
LaLesL lorecasL
26

Lenslons ln Lhe Luro Area, noL leasL ln vlew of Lhe forLhcomlng asseL quallLy revlew and sLress LesLs
of Lhe banks (see ChapLer 2). Looklng furLher ahead, Lhe medlum-Lerm growLh poLenLlal of Lhe lrlsh
economy ls hlghly uncerLaln ln Lhe wake of Lhe crlsls.
1he Councll's fan charL analysls provldes some gauge of forecasL uncerLalnLy, albelL based on
hlsLorlcal forecasL errors. 8y consLrucLlon, Lhe fan charLs assume LhaL rlsks are balanced. A fan charL
based on Lhe Cu growLh pro[ecLlons ln 8oJqet 2014 ls shown ln llgure 1.7.
ll Cu8L 1. 7: lAn CPA81 lC8 8LAL Cu C8CW1P

-8
-6
-4
-2
0
2
4
6
8
10
2009 2010 2011 2012 2013 2014 2013 2016

Assessmeot of 8oJqetoty lotecosts
27

2. ASSLSSMLn1 Cl 8uuCL1A8? lC8LCAS1S
SUMMAk
! 1he Ceneral CovernmenL deflclL ln 2013 ls llkely Lo be close Lo 7.3 per cenL of Cu and wlLhln
Lhe Lu deflclL celllng of 7.3 per cenL. 1he maln rlsks Lo Lhls ouLlook relaLe Lo Lhe exLenL of Lhe
currenL expendlLure overrun ln Lhe ueparLmenL of PealLh and Lhe uncerLalnLy surroundlng Lhe
Lax Lake ln Lhe flnal Lwo monLhs of Lhe year.
! 1he declslon Lo reduce Lhe planned flscal ad[usLmenL ln 8oJqet 2014 has ellmlnaLed Lhe
prevlously exlsLlng margln of safeLy relaLlve Lo Lhe key 3 per cenL SLablllLy and CrowLh acL
deflclL celllng for 2013. An analysls based on hlsLorlc growLh forecasL errors lndlcaLes LhaL Lhe
probablllLy of breachlng Lhe 3 per cenL celllng has rlsen from an esLlmaLed 1-ln-3 Lo an
esLlmaLed 1-ln-2, assumlng no changes ln Lhe prevlously announced ad[usLmenLs of t2 bllllon
for 8oJqet 2015.
! 1he budgeLary pro[ecLlons ln 8oJqet 2014 are assessed Lo be approprlaLe, buL are conLlngenL
on Lhe dellvery of slgnlflcanL expendlLure savlngs and Lhe achlevemenL of Lhe pro[ecLed
acceleraLlon ln economlc growLh. AddlLlonal rlsks sLem from conLlngenL llablllLles assoclaLed
malnly wlLh Lhe banklng secLor and rlsks relaLlng Lo lnLeresL raLes. 1hese sources of rlsk should
be borne ln mlnd ln a forward-looklng assessmenL of Lhe publlc flnances and warranL
lncreased aLLenLlon ln CovernmenL publlcaLlons.
! 1here was some publlc confuslon on Lhe slze and composlLlon of Lhe budgeLary ad[usLmenL
conLalned ln 8oJqet 2014. noLwlLhsLandlng welcome recenL lmprovemenLs ln flscal reporLlng,
fuLure 8udgeL sLaLemenLs should ldenLlfy more clearly Lhe lmpacLs of consolldaLlon measures.
! 1here has been a Lendency for Lhe ueparLmenL of llnance Lo underesLlmaLe Lhe ouLLurn for
non-Lax revenues and Lo overesLlmaLe lnLeresL expendlLures ln recenL offlclal forecasLs. lL
would be helpful for Lhe ueparLmenL Lo ouLllne ln more deLall how Lhese forecasLs are
derlved.
! CurrenL expendlLure celllngs have noL been blndlng wlLh aggregaLe revlslons Lo celllngs of t0.6
bllllon ln 2013 and t0.9 bllllon ln 2014. 1he ma[orlLy of Lhls 'sllppage' appears Lo arlse from
weaker economlc condlLlons and pollcy declslons.
28

under Lhe llscol kespooslblllty Act, Lhe Councll ls requlred Lo assess Lhe offlclal forecasLs ln relaLlon
Lo each 8udgeL and SLablllLy rogramme. 1hls chapLer assesses Lhe budgeLary forecasLs conLalned
ln 8oJqet 2014 followlng Lhe approach of Lhe prevlous llscol Assessmeot kepott (llAC, 2013a). 1hls
lnvolves a number of sLeps: (l) a revlew of recenL ueparLmenL of llnance forecasLs lncludlng Lhe
ouLlook for 2013 (SecLlon 2.2), (ll) an assessmenL of Lhe forecasLs ln 8oJqet 2014, whlch lncludes a
comparlson wlLh recenL forecasLs of oLher agencles (SecLlon 2.3), and (lll) an examlnaLlon of Lhe
senslLlvlLy of Lhe maln budgeLary aggregaLes Lo changes ln Lhe economlc ouLlook as well as a
broader assessmenL of rlsks (SecLlon 2.4).
2. 2 uL A81 ML n1 Cl ll nAnCL 8uuCL 1 A8? 8 C! L C1 l CnS l C8 2013
Accordlng Lo 8oJqet 2014, Lhe Ceneral CovernmenL deflclL ln 2013 ls pro[ecLed Lo be 7.3 per cenL
of Cu. 1hls ls lower Lhan was envlsaged ln boLh Lhe 201J 5toblllty ltoqtomme (5lu, 201J) and ln
8oJqet 201J (1able 2.1).
39
1he lmprovemenL relaLlve Lo 8oJqet 201J ls approxlmaLely 0.27 per cenL
of Cu and 0.16 per cenL relaLlve Lo 5lu 201J.
1he ouLlook for overall Ceneral CovernmenL revenues ln 2013 ls marglnally weaker ln 8oJqet 2014
Lhan ln 5lu 201J, alLhough Lhere have been lmporLanL composlLlonal changes reflecLlng weaker
growLh. ulrecL and lndlrecL Laxes are approxlmaLely t0.6 bllllon lower Lhan envlsaged ln 5lu 201J
and are now closer Lo whaL was expecLed ln 8oJqet 201J. 1he weaknesses on Lhe Lax slde are
llkely Lo be parLly offseL by sLronger recelpLs from soclal conLrlbuLlons and oLher sources of non-Lax
revenue (whlch lncludes CenLral 8ank surplus lncome and bank guaranLee recelpLs). Slnce Lhe
publlcaLlon of 8oJqet 2014, Lhe Lxchequer daLa for CcLober were released. Cn Lhe revenue slde,
Laxes were marglnally up on Lhe Lax proflle seL earller ln Lhe year wlLh soclal conLrlbuLlons
remalnlng ahead of proflle (Annex L).
CovernmenL expendlLure for 2013 has been revlsed downward by t0.6 bllllon from 5lu 201J due
Lo lower pro[ecLed lnLeresL paymenLs and weaker lnvesLmenL spendlng.
40
1he oLher maln
componenLs of CovernmenL expendlLure (publlc secLor pay, lnLermedlaLe consumpLlon and soclal
paymenLs) have been relaLlvely unchanged LhroughouL Lhe course of Lhe year. 1here are rlsks,

39
1he Ceneral CovernmenL deflclL Lo Cu raLlo ln 2012 was revlsed up Lo 8.2 per cenL (from 7.6 per cenL) [usL prlor Lo
8oJqet 2014. 1hls malnly reflecLed a reallocaLlon of t0.7 bllllon of recelpLs from moblle phone llcences from 2012 Lo
2013.
40
lnLeresL cosLs have been revlsed downwards conslderably slnce 5lu 201J reflecLlng a beLLer lnLeresL raLe
envlronmenL and reduced borrowlng by Lhe n1MA ln Lhe flnal quarLer of Lhe year.

29

however, assoclaLed wlLh Lhe PealLh budgeL where pressures appear Lo have re-emerged ln recenL
monLhs. ln Lhe perlod Lo end-CcLober, neL voLed currenL spendlng ln Lhe ueparLmenL of PealLh aL
t10.3 bllllon was t147 mllllon above budgeL. 1he underlylng expendlLure pressures ln PealLh are a
cause of concern and have prevlously been documenLed by Lhe Councll (llAC, 2012b, 2013a). (SofL
budgeL consLralnLs ln Lhe publlc flnances are dlscussed ln 8ox C). CLher areas of spendlng are llkely
Lo come ln close Lo LargeL helped ln parL by sLronger Lhan anLlclpaLed recelpLs from 8Sl
conLrlbuLlons and Lhe naLlonal 1ralnlng lund.
41

1he Councll ls of Lhe vlew LhaL a Ceneral CovernmenL deflclL of 7.3 per cenL of Cu for 2013 ls
achlevable, glven daLa Lo end-CcLober. Powever, Lhere are Lhree maln sources of rlsk Lo Lhls
ouLlook. llrsL, expendlLure pressures ln Lhe PealLh budgeL could lnLenslfy. Second, Lhe ouLlook for
Laxes Lhls year ls more uncerLaln reflecLlng Lhe change ln Lhe Llmlng of Lhe 8udgeL (dlscussed ln
deLall ln 8ox L). 1hlrd, Lhere ls a posslblllLy LhaL ongolng supporLs provlded Lo Lhe flnanclal secLor
(such as Lhe l88C llquldaLlon) could affecL Lhe budgeL deflclL. llnally, lL ls worLh noLlng LhaL Lhere
are a number of one-off facLors affecLlng Lhe Ceneral CovernmenL ouLlook for Lhls year, noLably
recelpLs arlslng from moblle llcence sales and cosLs assoclaLed wlLh Lhe llquldaLlon of l88C.
42

1hese rlsks could be compensaLed for ln oLher areas. ln parLlcular, Lhere has been a Lendency for
Lhe ueparLmenL of llnance Lo underesLlmaLe Lhe ouLLurn from non-Lax revenues (llgure 2.1). 1hese
prlmarlly relaLe Lo CenLral 8ank surplus lncome and bank guaranLee fees. ln addlLlon, lnLeresL
expendlLures have been overesLlmaLed by approxlmaLely t0.3 bllllon by Lhe ueparLmenL of llnance
ln 2012 and 2013.
43
Clven Lhe lncreaslng share of lnLeresL spendlng ln Cu and recenL dlvergences
from forecasL, lL would be helpful for Lhe ueparLmenL and Lhe n1MA Lo ouLllne ln more deLall how
lnLeresL pro[ecLlons are derlved.

41
1hese revenue sLreams are neLLed off gross expendlLures.
42
ln LoLal, Lhe reclasslflcaLlon of moblle phone sales from 2012 Lo 2013 lmproves Lhe 2013 budgeL deflclL by t0.7 bllllon.
1hls ls more Lhan offseL, however, by excepLlonal paymenLs made under Lhe Lllglble LlablllLles Scheme, whlch adds t1.1
bllllon Lo Lhe deflclL ln 2013.
43
1hls flgure ls based on forecasLs for lnLeresL expendlLure ln 2012 (Ceneral CovernmenL basls) and Lhe 5lu 201J
ouLlook for lnLeresL expendlLure ln 2013 relaLlve Lo Lhe laLesL ouLlook ln 8oJqet 2014.
30

1he Ceneral CovernmenL debL Lo Cu raLlo ls pro[ecLed Lo peak Lhls year aL 124 per cenL of Cu.
1he level of debL has lncreased aL a fasLer raLe Lhan Lhe deflclL of laLe reflecLlng a declslon Lo bulld
up a buffer of llquld flnanclal asseLs (for more deLalls, see ChapLer 4 and also 8arnes and SmyLh,
2013).

-100
0
100
200
300
400
300
600
700
800
900
2007 2008 2009 2009 S.8. 2010 2011 2012 2013e
t

m
l
l
l
l
o
n
s

ll Cu8L 2. 1: nCn- 1Ax 8LvLnuLS: Cu11u8n- lC8LCAS1S
CuLLurn beLLer Lhan forecasL
CuLLurn worse Lhan forecasL
Note. llgure deplcLs one-year ahead forecasL for Lxchequer non-Lax revenues versus acLual ouLLurn. 2009 S.8.
refers Lo Lhe SupplemenLary 8udgeL.

31

1A8LL 2. 1: uLA81MLn1 Cl ll nAnCL 8C! LC1l CnS lC8 2013

8||||ons
<"1*&$ =>?E FGH =>?E <"1*&$ =>?@
Dec 2012 Apr 2013 Cct 2013
Genera| Government Def|c|t 12.7 12.6 12.1
Genera| Government Def|c|t, of GD
44
7.6 7.S 7.3
Structura| Def|c|t, of GD 7.7 6.7 3.3
r|mary Def|c|t, of GD 2.0 2.6 2.7
kevenue 37.6 38.7 38.3
:0I 41.2 41.9 41.4
F)3,02 ;).$#,-"$,).+ 9.7 9.8 9.9
J$%&# 6.7 7.1 7.2
Lxpend|ture 70.4 71.3 70.7
K)8&#./&.$ F&#8,3&+ 27.2 27.3 27.0
F)3,02 :#0.+4&#+ 26.2 28.2 28.4
L.$&#&+$ 9.3 8.2 7.6
L.8&+$/&.$ 3.1 3.2 3.0
J$%&# 4.6 4.4 4.7
r|mary Lxpend|ture 61.1 63.1 63.0
Debt 203.3 207.0 203.9
Debt, of GD 121.3 123.3 124.1
Nom|na| GD 167.7 167.9 163.9
Nom|na| GD, growth 2.8 2.6 1.2
5ootces. 8oJqet 201J, 5lu 201J and 8oJqet 2014.
Note. numbers may noL sum due Lo roundlng.

44
1he Lxcesslve ueflclL rocedure (Lu) Ceneral CovernmenL deflclL celllng for lreland ln 2013 ls 7.3 per cenL of Cu
(3.1 per cenL ln 2014 and 2.9 per cenL ln 2013).
32

43
lor example, 83 per cenL of non-Lax revenues are collecLed by end-!uly, wlLh Lxchequer spendlng evenly apporLloned
LhroughouL Lhe year.
46
8ased on ueparLmenL of llnance esLlmaLes for Lxchequer Laxes.
47
1he pro[ecLed Lxchequer Lax Lake for 2013 prlor Lo 8oJqet 2014 was t38 bllllon. 8y end-SepLember, Lax recelpLs
amounLed Lo t27 bllllon.
8Ck L: I MAC1 CN ICkLCAS1S CI 8UDGL1 MCVI NG 1C CC1C8Lk
1he shlfL ln Lhe 8udgeL from uecember Lo CcLober has lmpllcaLlons for forecasLlng. 1hls
arlses prlmarlly from Lhe admlnlsLraLlon of Lhe lrlsh Lax (and soclal conLrlbuLlons) sysLem -
wlLh a very large proporLlon of lncome Lax (lncludlng self employed lncome) and corporaLe
Laxes collecLed ln Lhe flnal quarLer of Lhe year (speclflcally ln november - see 1able L1). ln
addlLlon, corporaLe and self-employed lncome Laxes are Lyplcally more dlfflculL Lhan oLher
Laxes Lo predlcL. lorecasLs of oLher sources of revenue as well as overall expendlLures are
less affecLed by Lhe movemenL ln Lhe Llmlng of Lhe 8udgeL.
43

1A8LL L1: 8CC81l Cn Cl LxCPLCuL8 1AxLS uuL l n 1PL ll nAL CuA81L8 Cl 2013
46

of 1ota| Cctober November December 1ota|
Income 1ax
9 14 8 31
VA1
2 13 2 19
Corporate 1ax
3 29 10 42
Lxc|ses 8 8 13 29
Cther 8 13 18 38
1ota| Lxchequer 1axes 6 1S 8 29
WlLh a uecember budgeL, around 90 per cenL of Lxchequer Laxes on average would have
been recelved prlor Lo Lhe flnallsaLlon of Lhe 8udgeL forecasLs. ln 2013, 70 per cenL of Lhe
pro[ecLed Lax Lake for Lhe year was recelved prlor Lo Lhe 8udgeL.
47
1he ueparLmenL of
llnance also had Lo prepare lLs macroeconomlc forecasLs wlLh Lwo monLhs fewer hlgh
frequency economlc daLa.
1he poLenLlal lmpacL on Lhe accuracy of Lax revenue forecasLs can be assessed uslng a
regresslon equaLlon of Lhe form:
1
L
! # $ ! 1
m
+ "
Where 1
t
ls Lhe Lxchequer Lax ouLLurn ln year L and 1
m
ls Lhe Lxchequer Lax Lake for Lhe flrsL
m" monLhs of year L. 1he equaLlon ls esLlmaLed for 9 and 11 monLhs of daLa for each year
from 2004 Lo 2012 for lndlvldual Lax heads and for overall Lax revenue.
As expecLed, Lhe resulLlng rooL mean square errors (8MSL) (1able L2 and llgure L1) lndlcaLe
LhaL forecasLlng accuracy for LoLal Lxchequer Laxes deLerloraLes when only 9 monLhs of daLa
are used. 1he forecasLlng of corporaLe Laxes ls by far Lhe mosL affecLed - buL Lhese accounL
for a relaLlvely small proporLlon of overall revenue (approxlmaLely 11 per cenL). ln conLrasL,
Lhe Lwo largesL Lax heads, lncome Lax and vA1, showed a more modesL lmpacL.


33

48
1hls relaLes Lo pay and flle daLes for self-assessed lncome Lax, caplLal galns Lax and caplLal acqulslLlons Lax. See
coosoltotloo oo loy & llle Jotes lo tbe cootext of o 8oJqet uoy oo ot befote 15
tb
Octobet, ueparLmenL of llnance, 2013.
1A8LL L2: SuMMA8? Cl LxCPLCuL8 1Ax L88C8S
kMSL, 9 months 11 months
Income 1ax
0.6 0.6
VA1
1.1 0.4
Corporate 1ax
19.9 2.8
Lxc|ses 1.0 1.6
Cther 1.6 2.7
1ota| Lxchequer 1axes 2.3 0.6

WhaL lmpacL would a decllne ln overall Lax forecasLlng accuracy of Lhls scale have on Lhe
Lxchequer deflclL forecasL? 1o lllusLraLe Lhe llkely effecL, Lhe 2012 Lxchequer deflclL of 9.1
per cenL of Cu ls Laken as a basellne. 1he lmpacL of Lwo forecasL errors ls Lhen consldered:
flrsL a negaLlve Lax forecasL error of 2.3 per cenL and Lhen a negaLlve error of 0.6 per cenL
(Lhe 8MSL for 9 and 11 monLhs of daLa, respecLlvely). All oLher revenue and expendlLure
lLems are held consLanL aL Lhelr acLual ouLLurn levels. 1hls exerclse suggesLs LhaL Lhe
Lxchequer deflclL (as a percenLage of Cu) would have been pro[ecLed aL 9.6 per cenL based
on 9 monLhs of daLa, slgnlflcanLly worse Lhan Lhe acLual ouLLurn, whlle for 11 monLhs of daLa
Lhe pro[ecLlon would have been very close Lo Lhe acLual ouLLurn aL 9.2 per cenL. 1hls shows
LhaL Lhe change of Llmlng of Lhe 8udgeL could have a pollcy-relevanL lmpacL on forecasL
accuracy.
ln summary, Lhe movemenL of Lhe 8udgeL Lo CcLober lncreases Lhe rlsk LhaL Lax-forecasLlng
and flscal-deflclL errors wlll be larger. 1hls mlghL warranL exLra cauLlon ln seLLlng Lhe flscal
sLance so as Lo ensure budgeLary LargeLs are meL and flscal rules are complled wlLh.
Moreover, Lhls analysls Lakes no accounL of addlLlonal dlfflculLles assoclaLed wlLh preparlng
macroeconomlc forecasLs wlLh Lwo monLhs fewer daLa. 8ecognlslng Lhe lssues arlslng from
Lhe exlsLlng sLrucLure of Lhe lrlsh Lax sysLem, Lhe ueparLmenL of llnance has lnlLlaLed a
consulLaLlon process Lo brlng forward Lhe paymenL of Laxes currenLly due ln november.
48

-4.0
-2.0
0.0
2.0
4.0
2004 2003 2006 2007 2008 2009 2010 2011 2012

ll Cu8L L1: 1Ax 8LvLnuL lC8LCAS1l nC L88C8S 8ASLu Cn 9 Anu
11 MCn1PS Cl uA1A
9monLhs
11monLhs
Note. llgure shows percenLage error from esLlmaLlng Lhe currenL year Lxchequer Lax
Lake, based on 9 and 11 monLhs of daLa.
34

2. 3 An AS S L S S ML n1 Cl 8uuC 1 2014 lC8L C AS 1 S
2. 3 . 1 Cu1 L CCk l C8 2014
ln 2014, Lhe Ceneral CovernmenL deflclL ls expecLed Lo lmprove Lo 4.8 per cenL of Cu based on
Lhe budgeLary ad[usLmenLs of t2.3 bllllon and nomlnal Cu growLh of 2.9 per cenL. 1he amounL of
consolldaLlon was scaled back from Lhe t3.1 bllllon ad[usLmenL prevlously slgnalled by Lhe
CovernmenL.
49
1here was some publlc confuslon relaLlng Lo Lhe slze of Lhe budgeLary ad[usLmenL ln
8oJqet 2014 due Lo Lhls sLaLemenL:
A furLher t0.33 bllllon ln revenues arlslng from measures lnLroduced prevlously (Lhe
carry-over") are esLlmaLed Lo beneflL 2014. ln addlLlon, expendlLure measures
lnLroduced prevlously wlll conLrlbuLe a furLher t0.1 bllllon Lo consolldaLlon. t0.6 bllllon
of Lhe budgeLary ad[usLmenL comes from addlLlonal resources and savlngs elsewhere.
Addlng all of Lhese Lo Lhe t1.83 bllllon ln new pollcy measures ouLllned above glves a
LoLal ad[usLmenL package of t3.1 bllllon ln 2014. 8oJqet 2014, page C.14, fooLnoLe 3.
8udgeLary ad[usLmenLs are usually undersLood Lo lnclude new revenue and expendlLure measures
as well as Lhe carry-over effecLs of measures from Lhe prevlous year. 1hey do noL Lyplcally lnclude
Lhe lLems conLrlbuLlng Lo Lhe t0.6 bllllon ln addlLlonal resources and savlngs" referred Lo above,
deLalls of whlch are lncluded ln 1able 2.2. 1hese savlngs should noL be consldered consolldaLlon
measures". 8udgeL sLaLemenLs should be as clear as posslble ln dlsLlngulshlng beLween new and
exlsLlng pollcy measures and Lhelr lmpacL on Lhe economy, and should avold Lhe poLenLlal for
confuslon caused by addlng lLems Lo Lhe sLandard measures of ad[usLmenL.
30

lrom 2014 onwards, a drafL budgeLary plan wlll need Lo be lncluded ln Lhe budgeLary
documenLaLlon Lo meeL new Lu requlremenLs. 1hls wlll show Lhe maln Ceneral CovernmenL
revenue and expendlLure componenLs on a no pollcy change basls as well as on a posL-budgeL basls
lncludlng deLalls of Lhe dlscreLlonary measures lnLroduced ln Lhe 8udgeL. 1hls should enhance
Lransparency.

49
ln 5lu 201J, Lhe CovernmenL proposed a t3.1 bllllon ad[usLmenL for 2014 lnvolvlng expendlLure measures of t2.0
bllllon and revenue measures of t1.1 bllllon.
30
A recenL lMl assessmenL found LhaL lreland scored well ln Lerms of budgeL reporLlng (see Annex C). 1hls was
however publlshed prlor Lo 8oJqet 2014.

33

1A8LL 2. 2: ll SCAL Au! uS1MLn1 l n 8uuC1 2014
8||||ons
New
Measures
Carry
Iorward
1ota|

A. Departmenta| Lxpend|ture
S1
1.S 0.1 1.6
J4 B%,3%M

;"##&.$ 1.4 0.1 1.5
;0(,$02 0.1 - 0.1
8. 1ax
S2
0.4 0.S 0.9
C. (= A+8) Conso||dat|on |n <"1*&$ =>?@ 1.9 0.6 2.S
D. Add|t|ona| kesources and Sav|ngs
S3
0.6
J4 B%,3%M

N&1"3$,). ,. 3)+$ &+$,/0$& 4)# $%& O,8& N&*,+$&# 0.15
N&1"3$,). ,. &+$,/0$& 4)# P:QC R&-$ +&#8,3& 3)+$+ 0.2
L.3#&0+& ,. &+$,/0$& 4)# ;&.$#02 <0.A +"#(2"+
,.3)/&
0.1
F$0$& 0++&$ #&20$&1 017"+$/&.$+ 0.15
L. (=C+D) Conso||dat|on and Add|t|ona| kesources
and Sav|ngs
3.1

1he maln Ceneral CovernmenL revenues and expendlLure pro[ecLlons underlylng 8oJqet 2014 are
shown ln 1able 2.3 (for comparlsons wlLh 8oJqet 201J and 5lu 201J, see Annex 1able l.1). 1oLal
Ceneral CovernmenL revenue ls pro[ecLed Lo lncrease by t2.4 bllllon ln 2014. 1hls consLlLuLes a
downward revlslon slnce 5lu 201J, reflecLlng a weaker ouLlook for nomlnal Cu. 1axes as a share
of Cu have been rlslng ln recenL years by close Lo one percenLage polnL of Cu per annum. 1he
ouLlook for Laxes ln 2014 ls sllghLly below Lhls raLe of lncrease and appears reasonable glven Lhe
LaxaLlon measures ln Lhe 8udgeL and Lhe ouLlook for nomlnal Cu growLh.
34
1he pro[ecLlons for
revenues lncluded large Lax carryover effecLs arlslng from pasL budgeLary measures, noLably Lhe

31
1he xpeoJltote kepott 2014 also makes reference Lo a furLher t0.3 bllllon ln AddlLlonal ressures". 1hls refers Lo
Lhe savlngs efforL made by ueparLmenLs Lo address lncreased servlce pressures whlle dellverlng Lhe requlred
consolldaLlon seL ouL ln 1able 2.2.
32
1ax measures conslsLed of sLamp duLles (t0.3 bllllon), lncome Lax (t0.2 bllllon), exclse duLy (t0.1 bllllon), vA1 (-t0.3
bllllon) as well as some oLher smaller changes.
33
1hls lnformaLlon was noL publlshed wlLh Lhe budgeLary documenLaLlon buL was lncluded ln Lhe MlnlsLer for llnance's
reply Lo arllamenLary CuesLlons 44688/13, 44829/13 and 44830/13 on 22 CcLober 2013. revlously such measures
have been presenLed wlLhln Lhe 8udgeL documenLaLlon, noLably Lhe t660 mllllon ln CLher" measures deLalled ln
8oJqet 2011 and Lhe t100 mllllon ln lncreased dlvldends" shown as parL of lasL year's 8udgeL.
34
1he ouLlook for Lxchequer Lax revenues ln 2014 ls marglnally weaker (by t30 mllllon) Lhan ln Lhe pre-8udgeL
stlmotes fot kecelpts ooJ xpeoJltote.
36

local properLy Lax.
33
1here are also some poslLlve one-off lLems acLlng Lo lmprove Lhe deflclL ln
2014.
36

1A8LL 2. 3: 8uuC1 2014 8C! LC1Lu CPAnCLS l n CCvL8nMLn1 8LvLnuL Anu LxLnul 1u8L

2014 201S 2016
Cumu|at|ve
2014-16
Ma|n Aggregates, of GD
Genera| Government 8a|ance
S7
-4.8 -2.9 -2.4

r|mary 8a|ance 0.0 2.0 2.6

Genera| Government Debt 120.0 118.4 114.6

Nom|na| GD Growth, 2.9 3.7 4.4

ro[ected Changes |n Government kevenue and Lxpend|ture, b||||ons
1ota| kevenue 2.4 2.4 1.8 6.6
1ax 2.4 2.2 1.7 6.3
Soc|a| Contr|but|ons 0.4 0.2 0.3 0.9
Cther -0.4 0.0 -0.2 -0.6
1ota| Lxpend|ture -1.6 -0.4 1.0 -1.0
Compensat|on of Lmp|oyees -0.3 -0.4 0.0 -0.6
Intermed|ate Consumpt|on -0.2 0.2 0.2 0.3
Soc|a| ayments -0.3 -1.2 0.2 -1.6
Interest 0.3 0.6 0.3 1.6
Cther -1.2 0.4 0.1 -0.7
r|mary Lxpend|ture -2.1 -1.0 0.4 -2.7
Note. numbers rounded Lo one declmal place.
Ceneral CovernmenL expendlLure ln 2014 ls expecLed Lo decllne by t1.6 bllllon as a resulL of Lhe
expendlLure measures ln 8oJqet 2014 and an lmproved ouLlook for Lhe labour markeL.
38
SLaylng
wlLhln Lhls LargeL wlll be heavlly dependenL on achlevlng t1.3 bllllon ln predomlnanLly currenL
expendlLure savlngs.
39
1he Lwo largesL spendlng ueparLmenLs, PealLh and Soclal roLecLlon, are

33
lor deLalls see:
hLLp://olreachLasdebaLes.olreachLas.le/debaLes20auLhorlng/debaLeswebpack.nsf/(lndexlookupdall)/20131002~W8L?
opendocumenL#W8L01800
36
ln 2014, sales of Lhe naLlonal loLLery llcence lmprove Lhe budgeL deflclL by t0.4 bllllon.
37
1hls refers Lo Lhe underlylng balance. 1hls ls Lhe Ceneral CovernmenL balance less flnanclal secLor measures as
deflned by Lhe ueparLmenL of llnance. llnanclal secLor measures add t10 mllllon Lo Lhe deflclL ln 2013, t90 mllllon ln
2014, t100 mllllon ln 2013 and t30 mllllon ln 2016.
38
1he unemploymenL raLe ls pro[ecLed Lo average 12.4 per cenL ln 2014 (down from 14.7 per cenL ln 2012 and 13.3 per
cenL ln 2013).
39
1hls ls also reflecLed ln Lhe dlfference beLween currenL expendlLure esLlmaLes ln Lhe pre-8udgeL stlmotes fot
kecelpts ooJ xpeoJltote and Lhe ouLlook ln 8oJqet 2014. ln Lhe former, voLed Lxchequer currenL expendlLure was

37

expecLed Lo dellver savlngs of t0.7 bllllon and t0.3 bllllon, respecLlvely. 1hese savlngs are parL of
Lhe revlsed deparLmenLal expendlLure celllngs for Lhe perlod Lo 2016.
Whlle furLher sLeps Lo develop a Medlum-1erm LxpendlLure lramework are welcome, currenL
expendlLure celllngs have noL been blndlng wlLh aggregaLe revlslons Lo celllngs of t0.6 bllllon ln
2013 and t0.9 bllllon ln 2014 (8ox l). 1he ma[orlLy of Lhls 'sllppage' appears Lo arlse from weaker
economlc condlLlons and pollcy declslons. Some of Lhese revlslons would appear Lo fall ouLslde of
Lhe deflned escape clauses" and hence breach Lhe provlslons of a deLalled admlnlsLraLlve Clrcular
lssued by Lhe ueparLmenL of ubllc LxpendlLure and 8eform on Lhe rules and procedures applylng
Lo Lhe expendlLure celllngs.
60
1he Clrcular speclfles Lhe clrcumsLances ln whlch boLh Lhe aggregaLe
and MlnlsLerlal Lhree-year celllngs may be revlsed and also llnks Lhe seLLlng of celllngs wlLh Lhe
expendlLure benchmark (see 8ox l).
Achlevlng Lhe planned savlngs ln PealLh remalns uncerLaln glven Lhe recenL hlsLory of expendlLure
overruns ln LhaL ueparLmenL. LxpendlLure overruns ln PealLh have averaged t260 mllllon per
annum over Lhe pasL 4 years (llgure 2.2). 1hese overruns have been documenLed prevlously by Lhe
Councll (llAC, 2012b) and may reflecL broader problems relaLlng Lo publlc expendlLure lncenLlve
sLrucLures (see 8ox C).
lor 2014, one-Lhlrd of Lhe assumed expendlLure savlngs ln PealLh arlse from pay-relaLed measures.
1he credlblllLy of Lhe budgeLary pro[ecLlons would be alded by Lhe provlslon of greaLer deLall on Lhe
quanLlflcaLlon of Lhe pro[ecLed lmpacL of planned budgeLary measures. 1he PealLh Servlces
LxecuLlve (PSL) naLlonal servlce plan ls noL due Lo be publlshed unLll end-november. Clven Lhe
recenL hlsLory of overspendlng ln Lhe healLh area and Lhe challenges ln fully lmplemenLlng Lhe
proposed savlngs measures for 2014, ensurlng adherence Lo Lhe healLh expendlLure celllng wlll be a
key LesL of Lhe new Medlum-Lerm LxpendlLure lramework (see 8ox l and Annex P).
Whlle Lhe Councll has concerns over Lhe dellvery of Lhe planned expendlLure savlngs ln 2014, Lhe
pro[ecLed deflclL of 4.8 per cenL of Cu based on Lhe macroeconomlc ouLlook ls assessed Lo be
approprlaLe. 1hls assessmenL ls also shared by Lhe Luropean Commlsslon and by Lhe lMl (1able
2.4). Powever, wlLh lnLeresL expendlLures seL Lo rlse furLher ln 2014 and wlLh lnvesLmenL spendlng
aL such low levels, Lhere are fewer buffers ln place Lo safeguard agalnsL sllppages on Lhe

pro[ecLed Lo be t39.7 bllllon on a no pollcy change basls ln 2014. As a resulL of Lhe measures ln Lhe 8udgeL, Lhls flgure
has been revlsed down Lo t38.4 bllllon.
60
hLLp://per.gov.le/wp-conLenL/uploads/Clrcular-13-13.pdf
38

expendlLure slde. Slmllarly, Lhe endlng of Lhe bank guaranLee scheme wlll also reduce room for
manoeuvre on Lhe revenue slde ln 2014. WlLh Lhls ln mlnd, Lhe margln of safeLy relaLlve Lo Lhe Lu
deflclL celllng ln 2014 of 3.1 per cenL has narrowed by half a percenLage polnL slnce 5lu 201J.
61

ll Cu8L 2. 2: CuMuLA1l vL CvL88unS l n Cu88Ln1 LxLnul 1u8L l n 1PL uLA81MLn1 Cl
PLAL1P: Ml u- ?LA8 vS Lnu- ?LA8
62

61
ln 5lu 201J, Lhe underlylng Ceneral CovernmenL deflclL was pro[ecLed Lo by 4.3 per cenL of Cu ln 2014.
62
CharL assumes a currenL voLed expendlLure overrun ln PealLh of t200 mllllon ln 2013.
-100
-30
0
30
100
130
200
230
300
330
400
430
2009 P1 2009 2010 P1 2010 2011 P1 2011 2012 P1 2012 2013 P1 2013e
t

m
l
l
l
l
o
n
s

Above rof||e
8e|ow rof||e

39

63
hLLp://www.flnance.gov.le/documenLs/publlcaLlons/guldellnes/budgeLref.pdf
64
hLLp://www.budgeL.gov.le/budgeLs/2012/uocumenLs/CL820-20LsLlmaLes20llnal.pdf
8Ck I: 1nL MLDI UM-1LkM LkLNDI 1UkL IkAMLWCkk
8ACkGkCUND
1he Notloool kecovety lloo 2011-2014 publlshed by Lhe ueparLmenL of llnance ln november
2010 ouLllned a range of budgeLary reforms lncludlng a Medlum-Lerm LxpendlLure lramework
(M1Ll) wlLh mulLl-annual celllngs on expendlLure. 1hese proposals were Lhen lncorporaLed
lnLo Lhe agreemenL enLered lnLo wlLh Lhe Lu/lMl ln 2010. Speclflcally, Lhe Lu/lMl rogramme
lncluded an expllclL commlLmenL on Lhe parL of lreland Lo lnLroduce effecLlve mulLl-annual
expendlLure celllngs.
1he lnlLlal proposal for a M1Ll was expanded upon as parL of Lhe ueparLmenL of llnance
dlscusslon documenL kefotmloq ltelooJs 8oJqetoty ltomewotk.
63
1he new CovernmenL
deLalled lLs proposed approach ln Lhe comptebeoslve xpeoJltote kepott 2012-2014 ln
uecember 2011 (CL8). 1hls also lnLroduced gross currenL deparLmenLal celllngs for 2012 Lo
2014 on an admlnlsLraLlve basls.
64
1he Councll documenLed Lhese celllngs ln lLs prevlous llscol
Assessmeot kepott (llAC, 2013a).
1wo furLher sLeps Lo flnallse Lhe lmplemenLaLlon of Lhe M1Ll were Laken ln 2013.
(l). 1he enacLmenL of Lhe Mlolstets ooJ 5ectetotles (AmeoJmeot) Act 201J. 1hls AcL seLs
ouL Lhe coverage of Lhe Lhree year aggregaLe celllngs and provldes LhaL boLh Lhe
aggregaLe celllng and MlnlsLerlal celllngs musL be seL and revlsed by CovernmenL
declslon.
and
(ll). 1he publlcaLlon of a more deLalled admlnlsLraLlve Clrcular on Lhe rules and
procedures applylng Lo Lhe celllngs. 1he admlnlsLraLlve Clrcular provldes for: Lhe
clrcumsLances ln whlch boLh Lhe aggregaLe and MlnlsLerlal Lhree-year celllngs may be
revlsed (escape clauses) and for a reconclllaLlon wlLh prevlous celllngs where Lhls
occurs, Lhe carryover of savlngs beLween years, Lhe sancLlon mechanlsms applylng
where ueparLmenLs exceed celllngs, and for perlodlc comprehenslve revlews of
expendlLure. 1he Clrcular also llnks Lhe seLLlng of celllngs wlLh Lhe expendlLure
benchmark requlremenLs aL a Luropean level. 1he expendlLure benchmark ls
dlscussed ln 8ox l.
Annex P seLs ouL more deLall on Lhe operaLlonal arrangemenLs of Lhe M1Ll.
1he M1Ll represenLs a slgnlflcanL move Lo Lop-down mulLl-annual budgeLlng from Lhe more
lncremenLal, boLLom-up approach LhaL was prevlously ln place. 1he LradlLlonal esLlmaLes
process focused on Lhe followlng year's expendlLure allocaLlon wlLh ueparLmenLs submlLLlng
lncremenLal 'demands', whlch were Lhen negoLlaLed beLween MlnlsLers. 1he mulLl-annual
40

63
volume l of Lhe kepott of tbe 5peclol Ctoop oo lobllc 5etvlce Nombets ooJ xpeoJltote ltoqtommes (2009)
compared Lhe Lhree-year expendlLure pro[ecLlons LhaL were publlshed each year ln Lhe annual 8udgeL volumes for 2000
Lo 2006 agalnsL Lhe acLual ouLLurns for expendlLure ln each of Lhose years and deLermlned LhaL whlle Lhe flrsL-year
ouLLurns Lyplcally came wlLhln 1 per cenL of Lhe pro[ecLlon, Lhe second-year ouLLurns came ln ahead of pro[ecLlon by 6
per cenL on average, whlle Lhe Lhlrd-year ouLLurn overran by around 12 per cenL on average.
66
8oJqet 201J expllclLly provlded for lncreases Lo Lhe Soclal roLecLlon and PealLh gross currenL celllngs for 2013 of
t130 mllllon and t60 mllllon respecLlvely. 8oJqet 2014 provlded for lncreases on Soclal roLecLlon (t130 mllllon),
PealLh (t187 mllllon) and !usLlce and LquallLy (t77 mllllon), wlLh more mlnor lncreases for a number of oLher
ueparLmenLs. AddlLlonal, more mlnor, lncreases were also made Lo celllngs for oLher ueparLmenLs for boLh years.
dlmenslon of expendlLure plannlng was seen as lndlcaLlve, non-blndlng and sub[ecL Lo fuLure
budgeLary processes. 1he approach led Lo slgnlflcanL weaknesses ln mulLl-annual plannlng
raLher Lhan ln budgeL execuLlon.
63
1he new approach puLs ln place blndlng Lhree-year celllngs
on ueparLmenLal expendlLure, whlch are seL wlLhln Lhe overall flscal rules esLabllshed ln Lhe
llscol kespooslblllty Acts 2012 ooJ 201J.
kLVI SLD LkLNDI 1UkL CLI LI NGS
1he revlslons Lo Lhe admlnlsLraLlve celllngs for 2013 and 2014 slnce Lhe CL8 are shown ln
1ables l1 and l2.
1A8LL l1: 8Lvl Sl CnS 1C C8CSS uLA81MLn1AL LxLnul 1u8L CLl Ll nCS lC8 2013

<"1*&$ G20..,.* <"1*&$ DI&3"$,).
m||||ons
;)/(#&%&.+,8&
DI(&.1,$"#& N&()#$
=>?=S=>?@
DI(&.1,$"#& N&()#$
=>?E
N&8,+&1 D+$,/0$&+
T)2"/& =>?E
Ce|||ng Ce|||ng Cr|g|na| Lst|mate
Dec 2011 Dec 2012 Apr 2013
Soc|a| rotect|on 19,906 20,246 20,233
nea|th 13,363 13,627 13,624
Lducat|on, |nc|. N1I 8,323 8,314 8,436
Iust|ce 2,198 2,200 2,163
Agr|cu|ture 1,037 1,037 1,049
Cthers 3,429 3,394 3,606
H.022)30$&1 -91 -170 13
1C1AL (GLC) 30,389 31,068 31,146
lL can be seen LhaL Lhere have been aggregaLe revlslons of t0.6 bllllon Lo Lhe celllngs ln 2013
and t0.9 bllllon ln 2014. 1he ma[orlLy of Lhls 'sllppage' appears Lo arlse from (l) Lhe lmpacL of
Lhe weaker macroeconomlc ouLlook on unemploymenL-relaLed welfare paymenLs and (ll)
pollcy declslons Lo ralse expendlLures ln selecLed ueparLmenLs.
66
1he recenL xpeoJltote
kepott 2014 presenLs reconclllaLlons of boLh aggregaLe and lndlvldual MlnlsLerlal celllngs.

41

67
As Lhe escape clauses are noL deflned ln Lhe Mlolstets ooJ 5ectetotles (AmeoJmeot) Act 201J, Lhese lncreases do noL
breach Lhe leglslaLlon. 1he Commlsslon has also hlghllghLed concerns LhaL provldlng for escape clauses" ln Lhe Clrcular
raLher Lhan Lhe leglslaLlon leaves room for ad hoc modlflcaLlons of Lhe celllngs,
(see ://ec.europa.eu/economy_flnance/publlcaLlons/occaslonal_paper/2013/pdf/ocp162_en.pdf)
Whlle Lhese reconclllaLlons represenL a slgnlflcanL sLep forward ln Lransparency, Lhe lncrease
of t400 mllllon arlslng from changed composlLlon of consolldaLlon" and furLher t43 mllllon
arlslng from expendlLure declslons" fall ouLslde of Lhe deflned escape clauses" for lncreaslng
Lhe aggregaLe celllng and consequenLly breach Lhe provlslons of Lhe Clrcular.
67
As parL of 8oJqet 2014, Lhe currenL expendlLure celllng for 2014 was revlsed upwards by t0.4
bllllon Lo t49.6 bllllon (1able l3). 1hls reflecLs Lhe declslon Lo scale back on Lhe planned
consolldaLlon efforL for 2014 by t0.4 bllllon. All oLher Lhlngs belng equal, Lhe celllngs should
have been lowered by t0.2 bllllon on accounL of beLLer Lhan expecLed labour markeL
condlLlons. 8evlslons Lo Lhe caplLal expendlLure celllng over Lhe perlod Lo 2016 were marglnal.
1A8LL l2: 8Lvl Sl CnS 1C C8CSS uLA81MLn1AL LxLnul 1u8L CLl Ll nCS lC8 2014

<"1*&$ G20..,.*
m||||ons
;)/(#&%&.+,8&
DI(&.1,$"#& N&()#$
=>?=S=>?@
DI(&.1,$"#& N&()#$
=>?E
DI(&.1,$"#& N&()#$
=>?@
Ce|||ng Ce|||ng Ce|||ng
Dec-11 Dec-12 Cct-13
Soc|a| rotect|on 19,296 19,633 19,631
nea|th 13,339 13,420 13,263
Lducat|on, |nc|. N1I 8,433 8,433 8,219
Iust|ce 2,083 2,063 2,097
Agr|cu|ture 1,029 1,029 1,019
Cthers 3,270 3,392 3,402
H.022)30$&1 -774 -760 -25
1C1AL (GLC) 48,716 49,232 49,606
1A8LL l3: 8uuC1 2014: Cu88Ln1 LxLnul 1u8L CLl Ll nCS 1C 2016
8||||ons 2014 201S 2016
Gross Current Lxpend|ture 49.6 48.3 48.6
U&02$% 13.3 13.1 13.1
Soc|a| rotect|on 19.6 19.4 19.4
Lducat|on 8.2 8.2 8.2
Cther Departments 8.3 7.7 8.0
H.022)30$&1 F08,.*+ 0.0 0.8 0.4

42

68
kornal (1992, p. 143) descrlbes Lhe sofL budgeL consLralnL ln Lhe followlng Lerms:
1he exLendlng of exLernal asslsLance ls a random varlable wlLh a glven probablllLy dlsLrlbuLlon, of whlch Lhe flrm's
declslon maker (and hls or her superlors) have a sub[ecLlve percepLlon." 1he greaLer Lhe sub[ecLlve percepLlon, LhaL ls,
Lhe safer Lhe flrm ls ln assumlng lL wlll recelve exLernal asslsLance, Lhe sofLer Lhe budgeL consLralnL. AnoLher
lnLerpreLaLlon ls Lhe followlng: 1he promlse Lo enforce Lhe observaLlon of Lhe budgeL consLralnL ls a commlLmenL of Lhe
bureaucracy LhaL lL wlll noL LoleraLe perslsLenL loss-maklng. Pardness versus sofLness refers Lo Lhe credlblllLy of Lhls
commlLmenL."
69
kornal et ol. (2003) provldes a synLhesls of Lhe sub[ecLlve probablllLy and dynamlc conslsLency lnLerpreLaLlons.
8Ck G: I NCLN1I VL CnALLLNGLS I N U8LI C LkLNDI 1UkL MANAGLMLN1: 1nL SCI1
8UDGL1 CCNS1kAI N1 AND 1nL kA1CnL1 LIILC1
ln Lhe llghL of perslsLenL expendlLure overruns ln healLh spendlng, Lhls box focuses on some of
Lhe sLrucLural challenges LhaL can affecL Lhe allocaLlon and conLrol of publlc expendlLure, wlLh
an emphasls on Lhe dlfflculLles of ensurlng spendlng ueparLmenLs face approprlaLe lncenLlve
sLrucLures. lL focuses ln parLlcular on Lwo lncenLlve challenges LhaL face all publlc expendlLure
sysLems: Lhe sofL budgeL consLralnL and Lhe raLcheL effecL.
1nL SCI1 8UDGL1 CCNS1kAI N1
1he concepL of Lhe sofL budgeL consLralnL" (S8C) was lnLroduced by !nos kornal ln Lhe
conLexL of sLaLe-conLrolled flrms. Powever, lL has found wlde appllcaLlon across varlous areas
of economlcs, lncludlng Lhe challenges of conLrolllng publlc expendlLure and avoldlng ballouLs
of flnanclal flrms. ln kornal's orlglnal formulaLlon, Lhe budgeL consLralnL ls soft -
noLwlLhsLandlng ex oote LhreaLs Lo lmpose a hard consLralnL - where Lhe declslon maker ln
conLrol of day-Lo-day expendlLure anLlclpaLes LhaL Lhe consLralnL ls llkely Lo be relaxed ex post
lf Lhe orlglnal consLralnL ls noL meL.
68
1he concepL has been reformulaLed uslng game-
LheoreLlc Lools as a dynamlc commlLmenL problem, where Lhe cenLral auLhorlLy cannoL
credlbly commlL Lo enforce a hard budgeL consLralnL ex post (see, e.g., uewaLrlponL and
Maskln, 1993).
69

noL surprlslngly, Lhe S8C has found parLlcular appllcaLlon ln Lhe area of publlc expendlLure.
1he S8C-relaLed lncenLlve challenge ls llkely Lo be especlally dlfflculL when lL comes Lo healLh
spendlng. 1here ls a paLLern of spendlng overruns ln publlc healLh spendlng ln lreland. lf
healLh spendlng ls noL adequaLely conLrolled relaLlve Lo budgeLed spendlng early ln Lhe year,
Lhe lmpllcaLlons of lmposlng hard budgeL consLralnLs laLer ln Lhe year can be severe - e.g.,
avoldable sufferlng and posslbly even deaLhs.
AnLlclpaLlng a relaxaLlon of consLralnLs ln Lhe face of such consequences, declslon makers are

43

70
1he ueparLmenL of ubllc LxpendlLure and 8eform Clrcular 13/13 descrlblng Lhe lmplemenLaLlon of Lhe expendlLure
celllng rules noLes:
[l]f Lhe ueparLmenL falls Lo lmplemenL Lhe CovernmenL ueclslon and breaches Lhe expendlLure celllng, on fooL of a
proposal from Lhe MlnlsLer for ubllc LxpendlLure and 8eform, Lhe CovernmenL may requlre LhaL Lhe ueparLmenL
repay" Lhe overrun ln Lhe nexL year. ln such clrcumsLances, Lhe ueparLmenL wlll be sub[ecL Lo an offseLLlng ad[usLmenL
ln Lhe MlnlsLerlal LxpendlLure Celllng for Lhe followlng year and wlll be requlred Lo devlse pollcy measures Lo llve wlLhln
Lhe reduced allocaLlons. ln clrcumsLances where Lhe ueparLmenL cannoL absorb Lhe full requlred ad[usLmenL ln Lhe
followlng year's expendlLure celllng, Lhe CovernmenL can declde LhaL lL may be necessary elLher Lo spread Lhe
ad[usLmenL over Lwo or more years or, ln clrcumsLances where Lhe overall CovernmenL LxpendlLure Celllng and/or Lhe
CovernmenL LargeLs for Lhe publlc flnances do noL allow such an approach, Lo allocaLe Lhe balance of reducLlons across
oLher ueparLmenLs so LhaL Lhe overall expendlLure paLh remalns on LargeL. 1hls wlll requlre re-prlorlLlsaLlon of
resources wlLhln each MlnlsLerlal envelope."
71
See lLem 13 of Clrcular 13/13, Medlum-1erm LxpendlLure lramework: AppllcaLlon Lo CurrenL LxpendlLure,
ueparLmenL of ubllc LxpendlLure and 8eform, 2013.
less fearful LhaL Lhe hard consLralnL wlll ulLlmaLely be lmposed, and face weaker lncenLlves Lo
conLrol spendlng earller ln Lhe year ln ways LhaL are less deLrlmenLal Lo users of healLh
servlces.
Looklng aL Lhe problem Lhrough Lhe lens of Lhe S8C makes clear LhaL slmply Lalklng Lough" ln
relaLlon Lo a wllllngness Lo follow Lhrough on LhreaLs of hard consLralnLs ls unllkely Lo be
sufflclenL Lo lmprove expendlLure conLrol. 1here musL be a change ln Lhe lncenLlve sLrucLures
ln a way LhaL mlnlmlses ex post harm Lo servlce users. osslble changes Lo Lhe sLrucLures
lnclude more lnLense monlLorlng and reporLlng earller ln Lhe budgeL perlod, more dlrecL
remuneraLlon or career consequences for declslon makers where budgeL consLralnLs are noL
meL, poLenLlal forfelLure of local conLrol lf Lhere ls a paLLern of fallure Lo meeL budgeL
consLralnLs, or dlrecL consequences ln Lerms of fuLure budgeLs as a resulL of currenL-year
budgeL overruns (alLhough such LhreaLs may also face credlblllLy problems).
70

1nL "kA1CnL1 LIILC1"
AnoLher common lncenLlves-relaLed challenge ln publlc expendlLure sysLems ls known as Lhe
raLcheL effecL". 1hls refers Lo Lhe phenomenon where fuLure budgeLs are deLermlned by
currenL spendlng. ln parLlcular, under-spendlng of Lhe currenL year's budgeL can lead Lo
budgeL reducLlons for fuLure years, ln Lurn leadlng Lo perverse lncenLlves Lo fully spend Lhe
currenL allocaLlon, even where lL ls recognlsed LhaL Lhe marglnal value of Lhe spendlng ls low.
1he raLcheL effecL can lnLeracL negaLlvely wlLh Lhe S8C where Lhe need Lo reduce Lhe fuLure
budgeLs of under-spendlng ueparLmenLs ls lncreased by Lhe need Lo ball-ouL" overspendlng
ueparLmenLs (see, e.g., 8oland, 2000).
1he new expendlLure celllngs framework aLLempLs Lo mlnlmlse Lhe damage done by Lhe
raLcheL effecL by allowlng some carryover of unspenL funds Lo fuLure years.
71
8egular
comprehenslve expendlLure revlews should also ensure LhaL ueparLmenLal expendlLure
allocaLlons reflecL value conslderaLlons, lnsLead of perversely rewardlng bad - and punlshlng
good - expendlLure-managemenL performance.
Cverall, Lhe new expendlLure celllng framework - relnforced by Lhe expendlLure benchmark
under Lhe revlsed SLablllLy and CrowLh acL and regular comprehenslve expendlLure revlews -
appears Lo be a slgnlflcanL sLep forward ln publlc expendlLure managemenL. Powever, careful
aLLenLlon wlll be requlred Lo ensure LhaL Lhe S8C and raLcheL effecL lncenLlve challenges are
Lackled ln Lhe acLual lmplemenLaLlon of Lhe new framework.
44

2. 3 . 2 Cu1 L CCk l C8 2013 Anu 2016
ln 2013 and 2016, Lhe Ceneral CovernmenL deflclL ls pro[ecLed Lo fall Lo 2.9 per cenL and 2.4 per
cenL of Cu, respecLlvely (1able 2.3). 1hese pro[ecLlons are premlsed on robusL revenue growLh,
expendlLure resLralnL and prevlously announced plans for furLher consolldaLlon of t2 bllllon. As a
resulL of Lhe reduced level of consolldaLlon ln 2014 and weaker growLh prospecLs, Lhe margln of
safeLy relaLlve Lo Lhe 2.9 per cenL deflclL llmlL for 2013 (seL by Lhe LCClln Councll) no longer
exlsLs.
72

1he pro[ecLlons for 2013 and 2016 assume a susLalned recovery ln nomlnal and real raLes of
growLh. rlmary expendlLure ls forecasL Lo decllne by 1.6 per cenL ln 2013 before lncreaslng
modesLly ln nomlnal Lerms ln 2016. lmpllclL ln Lhe expendlLure pro[ecLlons (noLably for soclal
paymenLs) ls Lhe assumed recovery ln Lhe labour markeL (llgure 2.3).
1here were qulLe slgnlflcanL revlslons Lo Lhe budgeLary pro[ecLlons ln 2013 and 2016, conLrary Lo
Lhe sLaLemenL ln 8oJqet 2014 LhaL ...Lhe flscal ouLlook ln 2013 remalns broadly unchanged". lor
2013, revenues are t0.7 bllllon weaker wlLh expendlLure t0.6 bllllon hlgher ln 8oJqet 2014 relaLlve
Lo Lhe ouLlook ln 5lu 201J (Annex 1ables l.2 and l.3). As a resulL, Lhe underlylng Ceneral
CovernmenL deflclL Lo Cu raLlo ln 2013 was revlsed upwards by 0.7 percenLage polnLs beLween
5lu 201J and 8oJqet 2014 Lo 2.9 per cenL.
1he debL Lo Cu raLlo ls expecLed Lo peak aL 124.1 per cenL ln 2013 before decllnlng over Lhe
pro[ecLlon perlod, helped by Lhe aLLalnmenL of a prlmary surplus ln 2013 and 2016 and a reducLlon
of cash balances of [usL over t11 bllllon Lo fund gross flnanclng requlremenLs.
73
1he maLurlLy
proflle of CovernmenL debL has lengLhened ln recenL monLhs reflecLlng Lhe declslon by Lu
mlnlsLers Lo lengLhen Lhe maLurlLles of lrlsh borrowlng under Lhe Lu/lMl programme as well as Lhe
declslon Lo replace Lhe promlssory noLes wlLh long-Lerm bonds.
74

72
ln 5lu 201J, Lhe deflclL ln 2013 was pro[ecLed Lo be 2.2 per cenL of Cu.
73
AL end-SepLember 2013, Lxchequer cash and oLher shorL-Lerm cash managemenL balances lncludlng deposlLs
amounLed Lo t23.6 bllllon.
74
1he welghLed average maLurlLy of long-Lerm lrlsh CovernmenL debL has been exLended from [usL over 7 years aL end-
2012 Lo 11 years ln mld-2013 as a resulL of Lhese developmenLs. 1he declslon of Lu mlnlsLers refers Lo Lhe Luropean
porLlon of lrlsh borrowlng from Lhe Lu/lMl.

43

1A8LL 2. 4 ll SCAL Cu1LCCk 1C 2016
of GD
<"1*&$
=>?@
IMI
Cct 2013
LSkI
Cct 2013
LC
Nov 2013
CLCD
Nov 2013
=>?E
Genera| Government 8a|ance -7.3 -7.3 -7.0 -7.4 -7.4
r|mary 8a|ance -2.7 -2.6 nA nA nA
Structura| 8a|ance -3.3 -3.2 nA -6.7 nA
Genera| Government Debt 124.1 123.3 123.9 124.4 132.3
Nom|na| GD, y]y 1.2 1.6 1.8 1.0 2.3
=>?@
Genera| Government 8a|ance -4.8 -4.9 -4.4 -3.0 -3.0
r|mary 8a|ance 0.0 0.1 nA nA 1.3
Genera| Government Debt 120.0 121.0 119.7 120.8 130.8
Nom|na| GD, y]y 2.9 3.0 3.9 2.3 nA
=>?V
Genera| Government 8a|ance -2.9 -2.9 nA -3.0 -3.1
r|mary 8a|ance 2.0 2.1 nA nA nA
Genera| Government Debt 118.4 118.3 nA 119.1 128.6
Nom|na| GD, y]y 3.7 4.0 nA 3.6 nA
=>?W
Genera| Government 8a|ance -2.4 -2.4 nA nA nA
r|mary 8a|ance 2.6 2.3 nA nA nA
Structura| 8a|ance -1.1 -2.1 nA nA nA
Genera| Government Debt 114.6 116.2 nA nA nA
Nom|na| GD, y]y 4.4 4.1 nA nA nA
Note. 8oJqet 2014 flgures refer Lo Lhe underlylng Ceneral CovernmenL 8alance. lMl flgures for budgeL balances
exclude flnanclal secLor supporL. CLCu flgures refer Lo Ceneral CovernmenL neL lendlng. 8oLh Lhe lMl and LS8l
forecasLs were publlshed prlor Lo 8oJqet 2014.

46

2. 4 SL nS l 1 l vl 1 ? Anu 8l S k AnAL ? S l S
1here remalns conslderable uncerLalnLy around Lhe 8udgeL pro[ecLlons for Lhe publlc flnances. 1hls
secLlon updaLes analysls ln earller Councll assessmenLs on rlsks relaLed Lo growLh buL also examlnes
oLher sources of rlsk, some of whlch were hlghllghLed ln recenL reporLs by Lhe lMl (lMl, 2013a and
lMl, 2013b, see also Annex C).
1he 8udgeL lncluded a 'SLaLemenL of 8lsks and SenslLlvlLy Analysls' (8oJqet 2014, pp C.23-C.26).
8lsks Lo Lhe cenLral economlc forecasLs were [udged Lo be LllLed Lo Lhe downslde" (see ChapLer 1).
llscal rlsks were reporLed due Lo normal uncerLalnLy assoclaLed wlLh Lax forecasLs, lncreased by Lhe
unpredlcLable lmpacL on corporaLlon Lax recelpLs of Lhe carry-forward of losses and Lhe change ln
Llmlng of Lhe 8udgeL. ln addlLlon, Lhere are also conLlngenL rlsks assoclaLed wlLh nAMA followlng
Lhe llquldaLlon of l88C, alLhough Lhe Luropean Commlsslon has lndlcaLed LhaL Lhls would be llkely
noL Lo affecL lreland's compllance wlLh Lu obllgaLlons.
1he Councll's assessmenL of Lhe flscal rlsks ls seL ouL below. A slgnlflcanL rlsk, noL lncluded ln Lhe
8oJqet 2014 assessmenL, sLems from Lhe forLhcomlng comprehenslve assessmenL of Lhe banklng
secLor lnvolvlng a supervlsory rlsk assessmenL, an asseL quallLy revlew and a sLress LesL and Lhe
poLenLlal lmpacL on banklng caplLal needs. 1here are also a number of slgnlflcanL medlum-Lerm
rlsks LhaL, whlle sLlll hlghly uncerLaln, should be consldered ln assesslng Lhe flscal ouLlook.
0
3
10
13
20
23
30
33
40
2012 2013 2014 2013 2016

o
f

C
u

ll Cu8L 2. 3: 8uuC1 2014 8C!LC1l CnS lC8 8l MA8? LxLnul 1u8L
CA1LCC8l LS
ay 8lll Soclal aymenLs ConsumpLlon CLher

47

1hree broad classes of rlsk are assessed ln Lhls SecLlon and are summarlsed ln 1able 2.3. 1hese rlsks
cenLre on Lhe uncerLalnLy surroundlng Lhe macroeconomlc ouLlook, posslble balance sheeL rlsks as
well as changes ln lnLeresL raLes. CLher more quallLaLlve/exLernal sources of rlsk are brlefly
dlscussed aL Lhe end of Lhe SecLlon.
1A8LL 2. 3: 8l Sk MA18l x

Source of k|sk

Nature of k|sk
(a) Growth ! PlsLorlcal volaLlllLy of lrlsh growLh and suscepLlblllLy of Lhe economy Lo
condlLlons ln Lhe lnLernaLlonal economy.
! uncerLalnLy surroundlng Lhe perslsLence of Lhe balance sheeL recesslon
and deleveraglng effecLs on domesLlc demand.
! uncerLalnLy surroundlng Lhe pharmaceuLlcal paLenL cllff" and lLs lmpacL
on ouLpuL and employmenL.
(b) 8a|ance Sheet ! 8anklng secLor requlrlng addlLlonal caplLal.
! LlquldaLlon of l88C resulLs ln a shorLfall for nAMA.
! Lower Lhan anLlclpaLed recovery on oLher nAMA asseLs.
! CovernmenL requlred Lo puL addlLlonal funds lnLo cerLaln secLors (e.g.,
lnsurance, houslng).
! ubllc penslon llablllLles.
! rlvaLe penslon llablllLles (e.g., WaLerford CrysLal case).
! CpporLunlLles Lo sell CovernmenL asseLs more qulckly/aL hlgher prlce Lhan
currenLly assumed.
(c) Interest kate ! Luro Area raLes lncrease.
! Spread on lrlsh debL narrows/wldens.

2. 4 . 1 SL nS l 1 l vl 1 ? Cl l l S C AL 8A1 l CS 1 C C8 CW1 P SPCC k S
1he uncerLalnLy surroundlng lrlsh growLh prospecLs has been repeaLedly hlghllghLed by Lhe Councll.
lrom ChapLer 1, lL ls clear LhaL Lhese uncerLalnLles remaln (and are LllLed Lo Lhe downslde) and are
compounded Lhls year by Lhe lmpacL of Lhe pharmaceuLlcals paLenL cllff". 1he Councll's llscal
leedbacks model can be used Lo lllusLraLe Lhe effecL on Lhe key flscal raLlos of alLernaLlve growLh
assumpLlons. ln llgure 2.4, Lhe growLh raLe ln nomlnal Cu ls allowed Lo vary wlLhln +/- Lwo
percenLage polnLs of Lhe 8oJqet 2014 basellne. lor example, lf growLh Lurns ouL Lo be one
percenLage polnL weaker per annum, Lhen Lhe Ceneral CovernmenL deflclL by 2013 would be
approxlmaLely one percenLage polnL above Lhe 8oJqet 2014 basellne (llgure 2.4a) wlLh Lhe lmpacL
on Lhe debL raLlo shown ln llgure 2.4b.

48

ll Cu8L 2. 4: AL1L8nA1l vL C8CW1P A1PS Anu ll SCAL Cu1CCMLS

lan charLs based on 8oJqet 2014 are shown ln llgure 2.3 and suggesL a 1-ln-2 probablllLy LhaL Lhe
deflclL Lo Cu raLlo would be above Lhe 2.9 per cenL of Cu Lu deflclL celllng ln 2013 ln Lhe
absence of offseLLlng ad[usLmenLs (llAC, 2012c and 2013a).
73
1he rlsk of mlsslng Lhe Lu deflclL
celllng has lncreased slnce Lhe Councll's llscol Assessmeot kepott lasL Aprll. ln LhaL reporL, Lhere
was a 1-ln-3 probablllLy of Lhe deflclL LargeL ln 2013 belng exceeded. 1he lncreased rlsk reflecLs a
comblnaLlon of weaker growLh prospecLs and Lhe declslon Lo lower Lhe consolldaLlon efforL ln 2014

73
1he fan charLs are consLrucLed Lo Lake accounL of growLh shocks as opposed Lo oLher Lypes of rlsk.
0.0
0.3
1.0
1.3
2.0
2.3
3.0
3.3
4.0
4.3
3.0
3.3
-2.0 -1.3 -1.0 -0.3 0.0 0.3 1.0 1.3 2.0

o
f

G
D

Annual dlfference ln nomlnal Cu growLh raLe from 8oJqet 2014 ouLlook
ll Cu8L 2. 4a: CLnL8AL CCvL8nMLn1 uLll Cl 1
ueflclL ln 2013
100
103
110
113
120
123
130
-2.0 -1.3 -1.0 -0.3 0.0 0.3 1.0 1.3 2.0

o
f

G
D

Annual dlfference ln nomlnal Cu growLh raLe from 8oJqet 2014 ouLlook
ll Cu8L 2. 4b: CLnL8AL CCvL8nMLn1 uL81
uebL ln 2013

49

from t3.1 bllllon (as seL ouL ln 5lu 201J) Lo t2.3 bllllon ln 8oJqet 2014. 1he fan charLs also lmply
an esLlmaLed 1-ln-3 probablllLy LhaL Lhe debL Lo Cu raLlo wlll fall Lo sLablllse by 2013 unless furLher
pollcy measures beyond Lhose currenLly planned are Laken (llgure 2.3b).
ll Cu8L 2. 3: lAn CPA81S lC8 kL? ll SCAL l nul CA1C8S
ll Cu8L 2. 3a: CLnL8AL CCvL8nMLn1 uLll Cl 1

ll Cu8L 2. 3b: CLnL8AL CCvL8nMLn1 uL81

-4
-2
0
2
4
6
8
10
2011 2012 2013 2014 2013 2016

o
f

C
u

60
70
80
90
100
110
120
130
140
130
2011 2012 2013 2014 2013 2016

o
f

C
u

30

2. 4 . 2 SL nS l 1 l vl 1 ? Cl l l S C AL 8A1 l CS 1 C C1 PL 8 " S PCC k S
8ALANCL SnLL1 kI SkS
1he CovernmenL's balance sheeL conLalns a wlde range of asseLs and llablllLles as well as lmporLanL
off-balance sheeL (conLlngenL and lmpllclL) llablllLles.
76
Accordlng Lo Lhe CSC, conLlngenL llablllLles
were valued aL t123 bllllon ln Lhe second quarLer of 2013.
77
1hese are malnly accounLed for by
exlsLlng guaranLees glven by Lhe CovernmenL and off-balance sheeL ubllc rlvaLe arLnershlps.
ConLlngenL llablllLy exposures have sLeadlly decllned slnce Lhelr peak ln 2008 reflecLlng Lhe endlng
of Lhe bank guaranLee scheme for new llablllLles and Lhe endlng of Lhe LxcepLlonal LlquldlLy
AsslsLance provlded Lo l88C (for more deLalls see, 8arnes and SmyLh, 2013).
Conslderable uncerLalnLy surrounds Lhese llablllLles boLh ln Lerms of Lhelr measuremenL and Lhe
llkellhood of Lhem becomlng acLual cosLs for CovernmenL. 1he banklng secLor has been a
slgnlflcanL source of shocks Lo Lhe economy ln recenL years wlLh lmpllclL (and expllclL) CovernmenL
commlLmenLs resulLlng ln Langlble cosLs for Lhe publlc flnances. LxcepLlonal paymenLs Lo Lhe
banklng secLor have had a slgnlflcanL lmpacL on Lhe headllne Ceneral CovernmenL 8alance slnce
2009 (1able 2.6). ln Lhls conLexL, lL ls surprlslng LhaL Lhe recenL rlsk analysls ln 8oJqet 2014 lncluded
very llmlLed references Lo posslble furLher shocks arlslng from Lhe banklng secLor.
1A8LL 2. 6: ll SCAL 8A1l CS Anu 8Ankl nC A?MLn1S, L8CLn1ACL Cl Cu

Genera| Government
8a|ance
Under|y|ng Genera|
Government 8a|ance
Contr|but|on from
8ank|ng ayments
2009 -13.7 -11.2 2.3
2010 -30.6 -10.6 20.0
2011 -13.1 -8.9 4.2
2012 -8.2 -8.2 0.0
5ootce. ueparLmenL of llnance, 2013.

76
ConLlngenL llablllLles are commlLmenLs, such as guaranLees, LhaL could lead Lo llablllLles lf Lrlggered, whlle lmpllclL
llablllLles have no conLracLual basls buL could neverLheless lead Lo expenses for Lhe CovernmenL ln Lhe fuLure.
77
ConLlngenL llablllLles Lend Lo be reporLed solely ln Lerms of Lhelr maxlmum posslble exposure. 1hls glves very llLLle
ldea of whaL Lhe rlsks are as Lhe maxlmum flgures say noLhlng abouL Lhe llkellhood of rlsks maLerlallslng. Pence, greaL
care ls warranLed ln lnLerpreLlng Lhese daLa.

31

C1LN1I AL LI A8I LI 1I LS AkI SI NG IkCM 1nL 8ANkI NG SLC1Ck
As regards exposures relaLlng Lo Lhe banklng secLor, 2014 wlll be a slgnlflcanL year ln Lerms of Lhe
poLenLlal reallsaLlon of furLher cosLs Lo Lhe SLaLe. lreland ls requlred Lo underLake an asseL quallLy
revlew wlLh banks Laklng remedlal acLlons ahead of Lhe 2014 sLress LesL (lMl, 2013).
78
1hese wlll
Lake place ln Lhe conLexL of a comprehenslve assessmenL by Lhe LC8, compromlslng a supervlsory
rlsk assessmenL, an asseL quallLy revlew and a sLress LesL. 1he laLLer ls Lo be coordlnaLed wlLh Lhe
wlder sLress LesL managed by Lhe Luropean 8anklng AuLhorlLy (L8A).
79

1here ls a rlsk LhaL Lhese revlews could lead Lo addlLlonal caplLal needs for lrlsh banks. ln Lhe evenL
of a bank needlng addlLlonal caplLal, a key quesLlon ls Lhe source of LhaL caplLal. Lu pollcy suggesLs
LhaL for vlable banks Lhls should:
...flrsL and foremosL, be made up wlLh prlvaLe sources of caplLal. lf prlvaLe sources of
caplLal are lnsufflclenL or noL readlly avallable, publlc backsLops mlghL need Lo be
drawn upon, ln compllance wlLh naLlonal pracLlces and Luropean rules, wlLh Lhe
overrldlng goal of ensurlng flnanclal sLablllLy.
80

1he LSM can ln some clrcumsLances provlde supporL lf naLlonal CovernmenLs face dlfflculLles ln
provldlng necessary flnanclng. 1hls wlll, however, be conLlngenL upon progress aL a Luropean level
on Lhe common supervlslon of banks.
lrom a Luropean perspecLlve, Lhree polnLs are worLh noLlng:
! naLlonal CovernmenLs remaln responslble for ensurlng LhaL any shorLfall ln bank caplLal ls meL
up Lo Lhe mlnlmum regulaLory sLandard of 4.3 per cenL Ller-1 caplLal.
! 1he LSM could provlde addlLlonal funds sub[ecL Lo an approprlaLe level of ball-ln of exlsLlng
credlLors ln llne wlLh boLh Lhe forLhcomlng 'Lu 8ank 8ecovery and 8esoluLlon ulrecLlve' and
Lu sLaLe ald rules.
81, 82

78
See lMl LenLh revlew, !une 2013, pp. 20, 37 and 64.
79
1he LC8 ls assumlng lLs supervlsory role ln november 2014. lor deLalls, see:
hLLp://www.ecb.europa.eu/press/pr/daLe/2013/hLml/pr131023.en.hLml
80
Luropean CenLral 8ank, noLe on Comprehenslve AssessmenL", CcLober 2013.
hLLp://www.ecb.europa.eu/pub/pdf/oLher/noLecomprehenslveassessmenL201310en.pdf
81
LSM funds for Lhls purpose are currenLly capped aL t60 bllllon. 1hls ls llne wlLh revlsed Lu sLaLe ald rules, whlch
foresee ball-ln of [unlor buL noL senlor debL holders. CommunlcaLlon from Lhe Commlsslon on Lhe appllcaLlon, from 1
AugusL 2013, of SLaLe ald rules Lo supporL measures ln favour of banks ln Lhe conLexL of Lhe flnanclal crlsls ('8anklng
CommunlcaLlon') (2013/C 216/01), 30 !uly 2013.
82
1he naLlonal auLhorlLles are requlred Lo conLrlbuLe 20 per cenL of any caplLal ln[ecLlon ln Lhe flrsL Lwo years and 10
per cenL LhereafLer. 1hls requlremenL can be suspended lf Lhe CovernmenL ls unable Lo meeL lL.
32

! 8eLroacLlve recaplLallsaLlon could Lake place ln excepLlonal cases (Lo be declded on a case-by-
case basls).

ln Lhls conLexL, Lhe laLesL Lu Councll sLaLemenL on 13 november on Lhe Luropean banklng sysLem
ls lnformaLlve. 1he Councll conflrmed LhaL:
..ln Lhe evenLuallLy LhaL Lhe comprehenslve assessmenLs/sLress LesLs reveal a caplLal
shorLfall, Lhe esLabllshed pecklng order (flrsL prlvaLe sources, Lhen naLlonal and euro
area/Lu lnsLrumenLs) wlll apply.
83

C1LN1I AL 8ANk CAI 1AL kLUI kLMLN1S
1he maln offlclal assessmenL of Lhe sLaLe of Lhe lrlsh banklng sysLem was provlded by Lhe CenLral
8ank ln Lhe 2011 lloooclol Meosotes ltoqtomme (lMl), (see CenLral 8ank of lreland 2011). 1hls
lnvolved a sLress LesL of Lhe caplLal requlremenLs of Al8, 8Cl, LS8 and 1S8 uslng base and sLress
macroeconomlc scenarlos Lo ensure LhaL Lhe banks would remaln well-caplLallsed.
As parL of Lhls process, Lhe CenLral 8ank publlshed Lhree-year pro[ecLed loan losses for Lhe lrlsh
banks, based on llfeLlme loan losses. lL was hoped LhaL Lhls process would help assure markeLs LhaL
caplLal requlremenLs would be sufflclenL Lo cover even exLreme and lmprobable losses. LsLlmaLes
of Lhe expecLed neL lncomes and deleveraglng ouLcomes relaLlng Lo each of Lhe covered banks
were also prepared ln order Lo arrlve aL Lhe amounLs requlred (lncludlng boLh asseL sales and
recaplLallsaLlon) Lo ensure sufflclenL caplLal was puL ln place Lo absorb fuLure losses.
Changes ln Lhe caplLal requlremenLs of banks are drlven by a number of varlables. 1hese lnclude
loan losses and proflLs/losses on deleveraglng and operaLlng proflLs/losses. lurLhermore, changes
ln Lhe slze of Lhe balance sheeL, movemenLs ln caplLal requlremenLs llnked Lo Lhe rlsk proflle of
bank asseLs (as reflecLed ln Lhe calculaLlon of rlsk-welghLed asseLs (8WA)) and changes ln
regulaLory sLandards all play a role. Loan and deleveraglng losses had been Lhe mosL slgnlflcanL
varlables ln prevlous years (CenLral 8ank of lreland, 2013). Powever, loan losses now appear Lo
have emerged as Lhe mosL lmporLanL varlable deLermlnlng performance glven LhaL deleveraglng
LargeLs have been vlrLually compleLed, assoclaLed loan halrcuLs (l.e., Lhe dlfferences beLween
purchase prlces pald by lnvesLors or acqulrers and Lhe nomlnal value) Lurned ouL relaLlvely more
favourable Lhan expecLed and operaLlng proflLs before lmpalrmenLs appear Lo be recoverlng.
ln Lerms of prospecLlve Lhree year losses ln Lhe lM, Lhe CenLral 8ank of lreland ln !une 2012
publlshed a revlew (Lhe CA8 2011 8evlew") of recenL bank performance relaLlve Lo Lhe Lhree

83
hLLp://www.conslllum.europa.eu/uedocs/cms_daLa/docs/pressdaLa/en/ecofln/139613.pdf

33

year loan losses anLlclpaLed ln Lhe orlglnal lM.
84
1he overall performance of Lhe economy has
Lurned ouL Lo be beLween Lhe base and sLress scenarlos alLhough closer Lo Lhe sLress scenarlo ln
Lerms of some of Lhe key macroeconomlc drlvers.
83
AcLual losses from uecember 2010 Lo !une
2012 were equlvalenL Lo 104 per cenL of Lhe base-case esLlmaLed losses buL only abouL Lhree-
quarLers of losses lmplled by Lhe sLress scenarlo. SLress case scenarlo losses over Lhe Lhree years
were esLlmaLed by Lhe CenLral 8ank aL t27.7 bllllon, comprlslng (l) Lhe uecember 2010 sLock of
provlslons of t9.9bllllon, and (ll) anLlclpaLed loan lmpalrmenL charges Lo end-2013 of t17.8 bllllon.
As regards posslble llfeLlme losses, as of !une 2013, Lhe lrlsh headquarLered banks covered by Lhe
lnlLlal lM 8eporL had reporLed approxlmaLely t34.3 bllllon ln loan lmpalrmenLs relaLlve Lo a
comblned gross loan book of t214.1 bllllon.
86
8eflecLlng Lhese lmpalrmenLs and ln recognlLlon of
Lhese expecLed losses, loan loss provlslons amounLlng Lo approxlmaLely t28.2 bllllon (or 32 per
cenL of Lhe value of lmpalred loans) have been seL aslde by Lhe banks ln order Lo cover any losses
lncurred over and above Lhe recoverable value of asseLs underlylng Lhese loans. under Lhe lM
exerclse, Lhe posL-deleveraglng llfeLlme loan losses were pro[ecLed aL t27.3 bllllon ln Lhe base case
scenarlo and t40.1 bllllon under Lhe adverse scenarlo. lor Lhe adverse scenarlo Lo have
maLerlallsed, compared Lo presenL levels, a conslderable rlse ln loan lmpalrmenLs and/or a very low
recovery raLe would be requlred. lor lnsLance, oLher Lhlngs belng equal, nearly Lhree-quarLers of
lmpalrmenLs occurrlng Lo daLe would have Lo maLerlallse as acLual llfeLlme losses.
87

1able 2.7 provldes an updaLe of Lhe performance of Lhe banks Lo !une 2013 uslng Lhe half yearly
flnanclal sLaLemenLs of each of Lhe Lhree lrlsh-headquarLered banks. 1hese esLlmaLes suggesL LhaL
as a resulL of Lhe recenL accumulaLlon of lmpalrmenL charges, acLual losses reallsed Lo daLe have
moved closer Lo (albelL remalnlng somewhaL below) Lhose of Lhe Lhree-year sLress scenarlo seL ouL
ln Lhe lM. Powever, whlle lmpalrmenLs now sLand aL close Lo 26 per cenL of LoLal gross loans ln
Lhe Lhree maln banks, Lhey appear Lo be rlslng aL a slower pace, as of Lhe flrsL slx monLhs of 2013. lL
ls worLh noLlng LhaL ln Lhe CenLral 8ank revlew, new guldellnes were clLed as one facLor LhaL has

84
Avallable aL: hLLp://www.cenLralbank.le/regulaLlon/lndusLry-secLors/credlL-
lnsLlLuLlons/documenLs/pcar20201120revlew20flnal.pdf
83
8eal Cu growLh was expecLed Lo average 1.3 per cenL per annum from 2010 Lo 2013 ln Lhe base case and 0.0 per
cenL ln Lhe sLress case, compared Lo an acLual ouLcome (uslng Lhe mosL recenL CenLral 8ank forecasL) of 0.3 per cenL.
Cn Lhe oLher hand, Lhe unemploymenL raLe has been lower Lhan envlsaged.
86
1he banks covered ln Lhe orlglnal lM now exlsL as 1S8, 8ank of lreland and Al8 followlng Lhe sale of lrlsh Llfe and
Lhe merger of L8S wlLh Al8.
87
lor a slmllar analysls, see Seamus Coffey, 'MorLgages ln Lhe Covered 8anks', 16
Lh
Sep 2013. Avallable aL:
hLLp://economlc-lncenLlves.blogspoL.le/2013/09/morLgages-ln-covered-banks.hLml
34

drlven a more conservaLlve recognlLlon of loan losses compared Lo Lhe orlglnal loan loss forecasLs
assumed.
AparL from expecLed loan losses, fuLure bank operaLlng proflLablllLy and regulaLory crlLerla wlll all
play a role ln assesslng Lhe flnanclal poslLlon of Lhe banks. 1hus, a clearer analysls of any posslble
new caplLal needs for lrlsh banks musL awalL Lhe comprehenslve assessmenL referred Lo above.
Clven Lhe rlsks lnherenL ln Lhe SLaLe's balance sheeL as a resulL of prevlous caplLal ln[ecLlons Lo Lhe
banklng secLor, lL ls deslrable LhaL any new caplLal needs LhaL mlghL emerge are sourced from Lhe
prlvaLe secLor or Lhe LSM lf posslble. Powever, glven Lhe lmporLance of adequaLely caplLallsed
banks Lo a well-funcLlonlng credlL sysLem - whlch may requlre a conLlnulng cushlon relaLlve Lo
whaLever are Lhe mlnlma seL by Lhe Luropean-wlde regulaLory auLhorlLles - furLher ln[ecLlons
mlghL prove unavoldable.
1A8LL 2. 7: uuA1L Cl l 8l SP- PLAuCuA81L8Lu 8Ank L8lC8MAnCL 8LLA1l vL 1C 8C! LC1Lu
LCSSLS l n 1PL lM ( t 8l L Ll Cn)

Losses 2011-2013
Actua|
|osses to
Iune 2012
Losses
from Iune
2012 to
Iune 2013
Actua|
Losses to
Iune 2013
IM Scenar|os

8ase SLress
(CA8
2011
8evlew)
(llAC
updaLe)
(llAC
updaLe)
8ase SLress
8CI 7.4 10.1 3.8 1.3 7.1 96.0 70.3
AI8 10.3 14.2 12.2 2.0 14.2 133.3 100.1
1S8 2.1 3.4 2.8 0.9 3.7 173.4 108.4
1ota| 20.0 27.7 20.8 4.2 2S.0 12S.0 90.2
5ootce. 8ank flnanclal reporLs, CenLral 8ank of lreland CA8 2011 8evlew and lnLernal calculaLlons.
Note. 8ased on sLarLlng sLock of provlslons and lncome sLaLemenL lmpalrmenL charges as reporLed ln CA8 2011
8evlew updaLed uslng banks' lncome sLaLemenL lmpalrmenL charges Lo !une 2013. 8oundlng may affecL Lhe LoLals.
As ln Lhe CA8 2011 8evlew, Lhe above updaLed esLlmaLes for !une 2012 Lo !une 2013 exclude lmpalrmenLs on
land/developmenL loans.

I N1LkLS1 kA1L SnCCkS
1he CovernmenL faces slgnlflcanL fundlng requlremenLs over Lhe medlum-Lerm. 1hls reflecLs a
comblnaLlon of fuLure flscal deflclLs and ongolng debL redempLlons. Accordlng Lo 8oJqet 2014
pro[ecLlons, Lhe CovernmenL wlll need Lo ralse approxlmaLely t12 bllllon per annum Lo 2016. ln

33

addlLlon, approxlmaLely 20 per cenL of Lhe sLock of CovernmenL debL ls aL varlable raLes.
88
8oLh Lhe
sLock of varlable debL" and flnanclng requlremenLs are suscepLlble Lo changes ln Lhe lnLeresL raLe.
1he llscal leedbacks model can be used Lo Lrace ouL Lhe effecL of dlfferenL lnLeresL raLes on Lhe
maln flscal aggregaLes. 1he 8oJqet 2014 average lnLeresL raLe ouLlook ls modlfled Lo allow for a +/-
130 basls polnL change ln nomlnal lnLeresL raLes from 2014 Lo 2016.
ln Lhe evenL LhaL lnLeresL raLes rlse by 130 basls polnLs, Lhe average lnLeresL raLe (Lhe raLlo of
lnLeresL paymenLs Lo Lhe sLock of CovernmenL debL) would rlse, buL by proporLlonaLely less (llgure
2.6). 1hls reflecLs Lhe large proporLlon of exlsLlng debL held aL flxed raLes. 1he sources behlnd Lhe
movemenL ln lnLeresL raLes (lncludlng movemenLs ln Lhe lnflaLlon raLe) are noL facLored lnLo Lhe
analysls LhaL follows.
WlLh a 130 basls polnL lncrease ln raLes, Lhe deflclL lncreases by abouL 0.3 percenLage polnLs of Cu
over Lhe pro[ecLlon perlod ln Lhe absence of offseLLlng ad[usLmenLs (1able 2.8). 1he lmpacL on Lhe
Ceneral CovernmenL debL raLlo ls relaLlvely modesL ln Lhe shorL-Lerm, wlLh debL rlslng by abouL 1.4
percenLage polnL by 2016.
89
1he resulLs are broadly symmeLrlcal for a decllne ln raLes.
1A8LL 2. 8: l n1L8LS1 8A1L SPCCkS
90

of GD 2014 201S 2016
8ase||ne
Genera| Government 8a|ance -4.8 -2.9 -2.4
Average Interest kate 4.0 4.2 4.4
+1S0 8as|s o|nts
-1S0 8as|s o|nts

88
1hls ls prlmarlly accounLed for by Lhe t23 blllon ln new floaLlng raLe bonds LhaL replaced Lhe promlssory noLes ln
lebruary 2013.
89
Whlle Lhe effecLs on Lhe debL raLlo are llkely Lo be modesL (relaLlve Lo Lhe sLock of debL) ouL Lo 2016, Lhe lmpacL
would compound over Llme.
90
numbers are rounded Lo one declmal place. 1he flgures relaLe Lo Lhe underlylng Ceneral CovernmenL 8alance.
36

l l Cu8 L 2. 6: AvL 8 ACL l n1 L 8 L S 1 8A 1 L

1he scenarlos above do noL conslder Lhe underlylng reasons behlnd lnLeresL raLe changes. 8aLes
can move Lhrough changes Lo Lhe rlsk premlum and/or Lhrough changes Lo Lhe rlsk-free raLe.
1hese are llkely Lo be lmporLanL. AL presenL, Luro Area lnLeresL raLes are aL hlsLorlcally low levels.
WheLher Lhe LC8 moves Lo ralse lnLeresL raLes depends on lnflaLlonary prospecLs across Lhe Luro
Area. 1he prospecL of hlgher raLes ln Lhe conLexL of sLronger growLh LhroughouL Lhe Luro Area
would be a more favourable scenarlo Lhan a case where growLh remalns weak ln lreland.
91
1he
domesLlc economy ls also llkely Lo have become more suscepLlble Lo changes ln Lhe lnLeresL raLe
slnce Lhe beglnnlng of Lhe flnanclal crlsls due Lo Lhe lncrease ln prlvaLe secLor lndebLedness (LS8l,
2013).
92

Clven Lhe rlsks of rlslng rlsk free" raLes lnLernaLlonally owlng Lo a posslble reducLlon ln moneLary
easlng, a rlse ln marglnal and varlable flnanclng cosLs for Lhe lrlsh CovernmenL could also reduce
any buffers Lhe SLaLe has when seeklng Lo reach deflclL LargeLs. lurLher, any deLerloraLlon ln Lhe
percelved credlLworLhlness of Lhe lrlsh CovernmenL ls also llkely Lo lead Lo hlgher raLes Lhrough Lhe
rlsk premlum channel.

91
1he scenarlos do noL dlsLlngulsh beLween lncreases ln real and nomlnal lnLeresL raLes.
92
LS8l Medlum-Lerm 8evlew: 2013-2020, LS8l (2013).
3.30
3.73
4.00
4.23
4.30
4.73
3.00
2013 2014 2013 2016

8udgeL 2014 CuLlook
+130bps shock
-130bps shock

37

C1nLk SCUkCLS CI kI Sk
1here exlsL a number of oLher sources of macroeconomlc or flscal rlsk. lL ls noL posslble Lo asslgn
any degree of probablllLy Lo Lhelr occurrence or Lo assess Lhelr poLenLlal quanLlLaLlve lmpacL. Cne
such unknown relaLes Lo a posslble exlL aL some sLage by Lhe uk from Lhe Lu (a 8rexlL").
93

AnoLher medlum-Lerm rlsk relaLes Lo Lhe ouLlook for lreland's corporaLe Lax raLe. 1he relaLlvely low
sLaLuLory Lax raLe, as well as Lhe Lransparency and predlcLablllLy of Lhe reglme, have been
lmporLanL facLors underlylng Lhe growLh of Lhe mulLlnaLlonal secLor whlch plays a key role ln
macroeconomlc and flscal performance. Cver 1,000 lnLernaLlonal companles have locaLed ln
lreland wlLh esLlmaLed employmenL (dlrecL and lndlrecL) of over 283,000 persons. 1oLal dlrecL
employmenL by uS mulLlnaLlonals alone was esLlmaLed aL over 100,000 ln 2009-2010, whlle Lhelr
dlrecL flscal conLrlbuLlon ln Lerms of corporaLe Lax and A?L ls of Lhe order of t2.3 bllllon Lo t3.0
bllllon.
94

ln recenL years, aLLenLlon has focused on a number of occaslons on Lhe lrlsh corporaLe Lax reglme.
Concerns have been ralsed by some Lu parLners as regards Lhe low sLaLuLory raLe (whlch remalns
Lhe sole prerogaLlve of naLlonal CovernmenLs Lo declde). 1here are also proposals Lo lnLroduce a
new (volunLary) Lu-wlde sysLem for calculaLlng Lhe base for corporaLe LaxaLlon (Lhe so called
Common ConsolldaLed CorporaLe 1ax 8ase (CCC18) approach) whlch could lmpacL upon Lhe
effecLlve Lax raLe payable by enLerprlses. MosL recenLly, based on analysls underLaken by Lhe
CLCu, Lhe C-7 and C-20 have ralsed Lhe lssue of base eroslon and proflL shlfLlng" (8LS). 1hese
are arrangemenLs whereby mulLlnaLlonal corporaLlons can avall of varlous feaLures of naLlonal Lax
sysLems Lo ensure LhaL subsLanLlal parLs of Lhelr overseas proflLs are noL Laxable. ln Lhls regard, ln

93
uk rlme MlnlsLer Cameron has announced a declslon Lo hold a referendum on a posslble uk exlL ln 2017, assumlng
hls parLy ls reLurned Lo power ln Lhe lnLervenlng general elecLlon. A 8rexlL could have conslderable lmpllcaLlons for Lhe
lrlsh economy, especlally lf lL enLalled resLrlcLlons on Lhe free movemenL of goods, servlces and labour beLween Lhe uk
and Lhe Lu. lreland's flnanclal servlces lndusLry could also be lmpacLed lf Lhe regulaLory and supervlsory reglmes were
Lo dlverge slgnlflcanLly.
94
Comprehenslve and Llmely daLa on Lhe macroeconomlc and flscal lmpacL of Lhe mulLlnaLlonal secLor ln lreland are noL
readlly avallable. Powever, Walsh (2010) as well as uS 8ureau of Lconomlc Analysls daLa provlde some broad
lndlcaLlons, especlally ln Lhe case of uS mulLlnaLlonals. uurlng 2009-2010 Lhe value added of uS companles ls esLlmaLed
Lo have averaged around t43 bllllon, or abouL one-flfLh of lrlsh Cu. WlLhln Lhe lrlsh manufacLurlng secLor, value added
by Lhe pharmaceuLlcal and compuLer, elecLronlcs and opLlcal secLors (boLh heavlly domlnaLed by mulLlnaLlonals, boLh
from Lhe uS and elsewhere) averaged over t16 bllllon. ln addlLlon Lo Lhe dlrecL (and lndlrecL) employmenL lmpacL, uS
mulLlnaLlonals conLrlbuLed t1.7 bllllon ln corporaLlon Lax ln 2009 (Lhe laLesL year for whlch daLa are avallable) and an
esLlmaLed t700 mllllon ln A?L Laxes ln 2011.
38

May 2013, Lhe sLrucLures used by overseas subsldlarles of Apple CorporaLlon based ln lreland
became Lhe sub[ecL of parLlcular uS publlc aLLenLlon.
93

Concerns on Lhese lssues sLem from several lnLerrelaLed conslderaLlons, lncludlng: Lhe flscal
pressures currenLly faclng many lndusLrlal counLrles, percepLlons of equlLy and falrness", fears of a
race Lo Lhe boLLom" among naLlonal Lax reglmes, and poLenLlal mlsallocaLlon of resources arlslng
from Lhe favourlng of acLlvlLles wlLh low pre-Lax buL hlgh afLer-Lax raLes of reLurn.
lL ls noL posslble Lo assess wheLher or when lnlLlaLlves currenLly under dlscusslon mlghL lead Lo
slgnlflcanL changes ln corporaLe Lax reglmes, aL elLher Lhe lnLernaLlonal or lndlvldual counLry level.
Powever, glven Lhe lmporLance of Lhe mulLlnaLlonal secLor ln lreland's medlum-Lerm growLh
sLraLegy, lL would be deslrable Lo underLake an assessmenL of Lhe rlsks were Lhe corporaLe Lax
reglme, for whaLever reason, Lo be sub[ecL Lo gradual modlflcaLlon over Llme.
ln a documenL accompanylng 8oJqet 2014 enLlLled lreland's lnLernaLlonal 1ax SLraLegy", Lhe
ueparLmenL of llnance announced Lhe CovernmenL's lnLenLlon Lo lnclude ln Lhe llnance 8lll a
change Lo lrlsh company resldency rules almed aL ellmlnaLlng Lhe use of mlsmaLches Lo allow
companles Lo be sLaLeless" ln Lerms of Lhelr place of Lax resldence. Such a move would address
lssues ralsed ln connecLlon wlLh Lhe Apple conLroversy referred Lo above, and would allevlaLe an
lmporLanL poLenLlal repuLaLlonal rlsk for lreland.

93
See for example CLCu (2013). AcLlon lan on 8ase Lroslon and roflL Sharlng", SenaLor Carl Levln (2013) Cffshore
roflL ShlfLlng and Lhe uS 1ax Code ,arL ll ( Apple lnc)", May 21, and lMl (2013), llscal MonlLor.
39

3. ASSLSSMLn1 Cl CCMLlAnCL Wl1P llSCAL 8uLLS
SUMMAk
! 8oJqet 2014 pro[ecLlons lmply compllance wlLh Lhe 8udgeLary 8ule ln 2013 and ln each
forecasL year ouL Lo 2016. 1hls ls because Lhe Ad[usLmenL aLh CondlLlon for Lhe sLrucLural
balance Lo converge Lowards lreland's Medlum 1erm 8udgeLary Cb[ecLlve ls meL.
! 8oJqet 2014 pro[ecLlons lmply LhaL Lhere ls almosL no margln of safeLy ln respecL of Lhe 3 per
cenL SLablllLy and CrowLh acL deflclL celllng ln 2013 (and Lhe endlng of Lhe Lxcesslve ueflclL
rocedure (Lu)).
! Medlum 1erm 8udgeLary Cb[ecLlves (M1C) have been revlsed, ralslng lreland's M1C from a
sLrucLural deflclL of 0.3 per cenL of Cu Lo a balanced budgeL ln sLrucLural Lerms. 1hls change -
oLher Lhlngs equal - would requlre close Lo an addlLlonal t0.8 bllllon of consolldaLlon afLer
2016, alLhough Lhere ls slgnlflcanL uncerLalnLy abouL how much ad[usLmenL Lhe rules wlll
ulLlmaLely requlre.
! 1he revlsed sLrucLural balance esLlmaLes provlded by Lhe ueparLmenL of llnance show
lmprovemenLs of aL leasL 1 percenLage polnL of Cu a year for Lhe years 2014 and 2013
compared Lo Lhe flgures ln 5lu 201J. 1hls level shlfL lmplles LhaL, aL Lhe mlnlmum requlred
pace of ad[usLmenL of Lhe sLrucLural balance under Lhe budgeLary rule, Lhere are Lwo years of
sLrucLural balance ad[usLmenL afLer 2016 Lo reach Lhe M1C.
! 1he 8oJqet 2014 documenLaLlon dld noL lnclude Lhe updaLed esLlmaLes of Lhe sLrucLural
balance. 1hls ls a serlous gap glven LhaL Lhe 8udgeLary 8ule uses Lhls measure. 1hese daLa
were subsequenLly provlded Lo Lhe Councll.
! 1he Lu 1wo ack" of governance reforms came lnLo force on 30 May 2013. 1hls brlngs a
number of changes Lo flscal procedures and lnsLlLuLlons ln lreland. 1he Councll's mandaLe has
been exLended Lo lnclude endorsemenL of macroeconomlc forecasLs prepared by Lhe
ueparLmenL of llnance. 1he Commlsslon has also clarlfled Lhe lnLerpreLaLlon of some of Lhe
exlsLlng Lu rules.

60

1he Councll's mandaLe lncludes monlLorlng compllance wlLh Lhe 8udgeLary 8ule and compllance
wlLh Lhe full range of flscal rules ls parL of Lhe Councll's assessmenL of Lhe flscal sLance. 1hls
ChapLer assesses compllance wlLh Lhe flscal rules ln llne wlLh Lhe full explanaLlon of Lhe rules seL
ouL ln Lhe prevlous llscol Assessmeot kepott by Lhe Councll (llAC, 2013a).
SecLlon 3.2 assesses Lhe conslsLency of 8oJqet 2014 wlLh Lhe flscal rules, lncludlng Lhe lmpllcaLlons
of Lhe debL rules and expendlLure benchmark ln Lhe llghL of recenL clarlflcaLlon from Lhe Luropean
Commlsslon. SecLlon 3.3 conslders Lhe comlng lnLo force ln May 2013 of Lwo new Lu regulaLlons,
known as Lhe 1wo ack", whlch lnclude Lhe allocaLlon of a new endorsemenL" funcLlon Lo Lhe
Councll (see ChapLer 1).
3. 2 CCM L l AnCL Wl 1 P 1 PL ll S CAL 8uL L S
1hls secLlon assesses Lhe conslsLency of 8oJqet 2014 pro[ecLlons wlLh Lhe 8udgeLary 8ule, whlch
Lhe Councll ls expllclLly requlred Lo monlLor, as well as compllance wlLh wlder lrlsh and Lu flscal
rules.
3. 2 . 1 CCM L l AnC L Wl 1 P 1 PL 8uuCL 1 A8 ? 8uL L
1he offlclal documenLaLlon for 8oJqet 2014 dld noL lnclude an esLlmaLe for Lhe sLrucLural budgeL
balance. Clven LhaL flscal pollcy ls now sub[ecL Lo rules seL ln Lerms of Lhe sLrucLural balance, Lhls ls
a serlous gap ln Lhe lnformaLlon provlded by Lhe ueparLmenL of llnance.
96

ro[ecLlons underlylng 8oJqet 2014 - provlded aL Lhe Councll's requesL afLer Lhe 8udgeL - are
conslsLenL wlLh compllance wlLh Lhe 8udgeLary 8ule ln 2013, 2014 and ln each year ouL Lo 2016,
when Lhe pro[ecLlons end, as Lhe Ad[usLmenL aLh CondlLlon of lmprovlng Lhe sLrucLural balance by
aL leasL 0.3 percenLage polnLs of Cu would be complled wlLh ln all years (1able 3.1).
97

96
1here ls a formal Lu requlremenL for Lhls lnformaLlon Lo be publlshed ln SLablllLy rogrammes. Whlle Lhere ls
currenLly no such requlremenL for Lhe 8udgeL documenLaLlon, Lhls ls a key plece of lnformaLlon. 1he requlremenLs of
Lhe 1wo ack" wlll mean LhaL a drafL budgeLary plan musL be publlshed as parL of Lhe budgeLary documenLaLlon from
2014. 1hls drafL budgeLary plan would lnclude an assessmenL of Lhe cycllcal poslLlon ln llne wlLh LhaL provlded ln Lhe
5toblllty ltoqtomme upJote. Culdellnes on Lhe lnformaLlon Lo be lncluded ln drafL budgeLary plans are provlded by Lhe
Luropean Commlsslon (See LC, 2013b). ln a formal sense, compllance wlLh Lhe 8udgeLary 8ule ls assessed uslng daLa
produced aL Lhe Llme of Lhe 5toblllty ltoqtomme upJote. neverLheless, lf Lhe rules are Lo provlde a gulde Lo pollcy,
esLlmaLes are needed for each budgeLary exerclse (see Aprll 2013, llscol Assessmeot kepott).
97
1hese sLrucLural balance pro[ecLlons were supplled Lo Lhe Councll on 24 CcLober and made publlc ln answers Lo a
arllamenLary CuesLlon on 3 november 2013 (numbers 131/132).
Assessmeot of compllooce wltb llscol koles

61

1A8LL 3. 1 SuMMA8? Cl MAl n ll SCAL ACC8LCA1LS
98

2013 2014 201S 2016
Ma|n Aggregates, of GD
Genera| Government 8a|ance -7.3 -4.8 -2.9 -2.4
Structura| 8a|ance -3.3 -3.6 -1.6 -1.1
Cutput Gap ( otent|a| GD) -3.3 -2.9 -2.7 -2.3
Genera| Government Debt 124.1 119.9 118.3 114.3
1he flscal poslLlon ls expecLed Lo remaln over Lhe pro[ecLlon horlzon some dlsLance from Lhe Lwo
oLher condlLlons LhaL would lead Lo compllance wlLh Lhe 8udgeLary 8ule: Lhe headllne budgeL
balance would remaln ln deflclL, and Lhe Medlum 1erm 8udgeLary Cb[ecLlve (M1C) of a balanced
budgeL ln sLrucLural Lerms would noL be achleved.
1he pro[ecLed lmprovemenL ln Lhe sLrucLural balance ls aL leasL one percenLage polnL for all years
from 2013 Lo 2013, conslderably larger Lhan Lhe mlnlmum requlred ad[usLmenL of 0.3 percenLage
polnLs. uesplLe many uncerLalnLles Lhere ls some margln Lo accommodaLe negaLlve shocks wlLhouL
[eopardlslng compllance wlLh Lhe 8udgeLary 8ule ln Lhe years Lo 2013.
ln meeLlng Lhe requlred sLrucLural ad[usLmenL, cycllcal shocks should - by deflnlLlon - have no
effecL on Lhe sLrucLural balance. 1he maln sources of rlsk Lo meeLlng Lhe rules are sLrucLural
deLerloraLlons ln Lhe flscal poslLlon. 1hese could arlse elLher because of unexpecLed changes ln
pollcy, such as hlgher Lhan planned non-cycllcal spendlng, or because of a measured deLerloraLlon
ln Lhe sLrucLural balance resulLlng from dlfferences beLween Lhe anLlclpaLed and acLual lmpacL of
Lhe cycle and/or revlsed esLlmaLes of Lhe ouLpuL gap.
99

1he llscol kespooslblllty Act allows for devlaLlons from Lhe requlred ad[usLmenL paLh lf Lhls arlses
.only as a resulL of excepLlonal clrcumsLances and Lhe fallure does noL endanger flscal
susLalnablllLy ln Lhe medlum Lerm" and ls conslsLenL wlLh Lhe rules of Lhe SLablllLy and CrowLh

98
1able shows Lhe underlylng Ceneral CovernmenL 8alance as deflned by Lhe ueparLmenL of llnance.
99
aradoxlcally, a key rlsk aL 8udgeL Llme for meeLlng sLrucLural balance LargeLs for Lhe same year ls blqbet Lhan
anLlclpaLed ouLpuL. Clven LhaL flscal ouLLurns for much of Lhe year are already largely known and assumlng poLenLlal
ouLpuL ls flxed, a sLronger Lhan anLlclpaLed growLh ouLLurn lmplles LhaL more of Lhe galn ln revenue ls cycllcal and less
of Lhe lmprovemenL ln Lhe budgeL balance ls sLrucLural Lhan anLlclpaLed (puL anoLher way, Lhls ouLcome lmplles LhaL
Lhe cycllcal elasLlclLy of revenue ls revealed Lo be lower Lhan assumed ln Lhe sLrucLural budgeL ad[usLmenL).
62

acL (SC)". 1he SC allows for Lemporary devlaLlons from Lhe ad[usLmenL paLh whlch are noL
regarded as slgnlflcanL before applylng Lu procedures.
100, 101
IU1UkL I MLI CA1I CNS CI 1nL M1C
8y 2013 and Lhe scheduled closlng of Lhe Lxcesslve ueflclL rocedure (Lu), Lhe sLrucLural balance
ls esLlmaLed Lo reach -1.6 per cenL of Cu. lreland's M1C for Lhe sLrucLural balance was revlsed ln
2013 from -0.3 per cenL of Cu Lo a balanced budgeL ln sLrucLural Lerms ln llne wlLh Lu procedures
(8ox P). 1he maln reason for Lhe sLrlcLer M1C resulLlng from Lhls exerclse ls Lhe hlgher debL-Lo-Cu
raLlo slnce Lhe prevlous esLlmaLe was made ln 2009 (based on daLa for 2008). 1hls LlghLenlng ln Lhe
requlred sLrucLural balance - oLher Lhlngs equal - would requlre addlLlonal consolldaLlon of close
Lo t0.8 bllllon aL some polnL Lo reach Lhe new sLandard compared wlLh Lhe prevlous M1C.

100
1emporary devlaLlons from Lhe ad[usLmenL paLh of 0.3 percenLage polnLs ln one year or cumulaLlvely over Lwo years
from Lhe M1C are allowed ex post.
101
LxcepLlonal clrcumsLances are deflned ln Lhe llscol kespooslblllty Act 2012 ooJ 201J as .a perlod durlng whlch an
unusual evenL ouLslde Lhe conLrol of Lhe SLaLe has a ma[or lmpacL on Lhe flnanclal poslLlon of Lhe Ceneral CovernmenL,
or .a perlod of severe economlc downLurn".
8Ck n: 1nL MLDI UM-1LkM 8UDGL1Ak C8I LC1I VL (M1C)
1he Medlum-1erm 8udgeLary Cb[ecLlve (M1C) and progress Lowards lL, ls one of Lhe
condlLlons underplnnlng Lhe lrlsh 8udgeLary 8ule, as well as formlng Lhe cornersLone of Lhe
prevenLlve arm" of Lhe Lu SLablllLy and CrowLh acL. lL ls seL aL Lhe Lu-level for each counLry
uslng a formula. 1hls box provldes an overvlew of how Lhe M1C ls seL and how progress
Lowards lL ls measured.
SL11I NG 1nL M1C
1he M1C ls seL ln Lerms of Lhe sLrucLural budgeL balance (l.e. Lhe cycllcally-ad[usLed Ceneral
CovernmenL balance neL of one-off and Lemporary measures.)
M1Cs are seL for all counLrles ln an Lu-wlde exerclse aL regular Lhree year lnLervals, mosL
recenLly ln 2009 and Lhen agaln ln 2013. 1he M1C ls deLermlned by a formula Laklng lnLo
accounL a number of conslderaLlons as seL ouL below. unLll 2013, Lhls formula was noL made
fully publlc.
1he M1C can never be lower Lhan a deflclL of -1 per cenL of Cu ln sLrucLural Lerms for any
Luro Area counLry. CounLrles, such as lreland, LhaL slgned Lhe Lu llscal CompacL have
commlLLed Lo M1Cs no lower Lhan -0.3 per cenL of Cu unLll Lhelr debL raLlo ls slgnlflcanLly
below 60 per cenL of Cu and Lhe rlsks ln Lerms of long-Lerm susLalnablllLy of publlc flnances
are low.
Sub[ecL Lo Lhese consLralnLs, Lhe M1C ls seL Lo meeL Lhree ob[ecLlves:
! A safeLy margln wlLh respecL Lo Lhe 3 per cenL of Cu deflclL llmlL. 1hls ls based on

63

102
lormally, Lhls can be expressed as:
"#$
#
% $
%
&
'
&'()# *+
&, -*+
(
)
*
+
- (.(/0&1 $ '()+ - (.22
,
# 3/4,
where q ls Lhe long-run nomlnal growLh raLe, b ls Lhe debL-Lo-Cu raLlo and 52 ls an LC lndlcaLor of fuLure agelng cosLs.

achlevlng Lhe lowesL percenLlle of counLry-speclflc ouLpuL gap esLlmaLes over Lhe hlsLorlcal
sample, glven Lhe esLlmaLed elasLlclLy of Lhe budgeL Lo Lhe ouLpuL gap.
! Lnsure susLalnablllLy or rapld progress Lowards susLalnablllLy of publlc debL, Laklng lnLo
accounL Lhe economlc and budgeLary lmpacL of agelng. 1hls ls seL as Lhe sum of:
- 1he budgeL balance needed Lo sLablllse Lhe debL-Lo-Cu raLlo aL 60 per cenL glven
long-Lerm growLh and lnLeresL raLe pro[ecLlons.
- An addlLlonal 2.4 basls polnLs for each addlLlonal percenLage polnL by whlch Lhe
debL Lo Cu raLlo exceeds 60 per cenL.
- Cne-Lhlrd of Lhe budgeL balance requlred Lo meeL Lhe presenL value of fuLure age-
relaLed expendlLure.
102

! Allow room for budgeLary manoeuvre, ln parLlcular Laklng lnLo accounL publlc lnvesLmenL
needs.
lor lreland, Lhe upward revlslon Lo Lhe M1C slnce lL was prevlously seL ln 2009 (whlch
LlghLened Lhe M1C from a sLrucLural deflclL of 0.3 per cenL of Cu Lo balance) arlses from a
comblnaLlon of Lhe ma[or changes of clrcumsLances slnce Lhe crlsls, along wlLh some mlnor
meLhodologlcal changes. 1he maln drlver ls Lhe hlgher debL-Lo-Cu raLlo.
MLASUkI NG kCGkLSS 1CWAkDS 1nL M1C
unLll Lhe M1C ls meL, Lhe Lu rules requlre lmprovemenL ln Lhe sLrucLural balance each year
wlLh 0.3 per cenL of Cu as a benchmark. A greaLer efforL can be soughL ln good Llmes wlLh
efforL more llmlLed ln bad Llmes. rogress ls assessed on Lhe basls of plans for Lhe currenL and
Lhe nexL year (ex oote assessmenL) and also for Lhe prevlous year (ex post assessmenL).
lf Lhere ls slgnlflcanL devlaLlon" ex post from Lhls paLh, Lhls can open Lhe way Lo a
recommendaLlon from Lhe Lu and sancLlons.
SlgnlflcaLlon devlaLlons are assessed uslng Lwo complemenLary lndlcaLors:
! 1he slze of Lhe devlaLlon ln Lhe sLrucLural balance from Lhe ad[usLmenL paLh Lo Lhe M1C.
! An expendlLure benchmark LhaL publlc spendlng grows below Lhe medlum-Lerm poLenLlal
growLh raLe of Lhe economy (see 8ox l).
ln boLh cases, a devlaLlon of 0.3 percenLage polnLs of Cu ln one year or 0.23 percenLage
polnLs ln each of Lwo consecuLlve years ls consldered slgnlflcanL.
64

Clven Lhls new M1C, [usL over Lwo more years of addlLlonal lmprovemenLs ln Lhe sLrucLural balance
aL Lhe mlnlmum requlred pace of 0.3 percenLage polnLs would be requlred from 2016 Lo reach Lhe
M1C under Lhe 8oJqet 2014 pro[ecLlons. As dlscussed ln ChapLer 4, Lhls would allow for only small
lncreases ln nomlnal spendlng ln Lhe absence of measures Lo lncrease revenues. lrom an Lu
perspecLlve, a fasLer raLe of convergence Lhan Lhe mlnlmum 0.3 percenLage polnLs may be
expecLed glven lreland's hlgh debL levels.
103

Powever, measurlng and pro[ecLlng Lhe sLrucLural balance ls challenglng. LsLlmaLlng Lhe ouLpuL
gap, forecasLlng Lhe fuLure paLh of poLenLlal Cu and ad[usLlng Lhe budgeL balances for Lhe cycle
remaln uncerLaln and lmpreclse. Clven Lhls lmpreclslon and LhaL Lhe M1C ls noL pro[ecLed Lo be a
meL for a number of years, Lhere ls slgnlflcanL uncerLalnLy abouL whaL Lhe rules wlll ulLlmaLely
requlre ln Lerms of Lhe LoLal amounL of consolldaLlon.
1he dlfflculLy ln measurlng Lhe sLrucLural balance ls hlghllghLed by recenL revlslons Lo esLlmaLes by
Lhe ueparLmenL of llnance. 1he esLlmaLes of Lhe ouLpuL gap and consequenLly Lhe sLrucLural
balance ln 8oJqet 2014 have changed slgnlflcanLly slnce 5lu 201J. 1he laLesL esLlmaLes for Lhe
sLrucLural balance are compared Lo prevlous esLlmaLes publlshed by Lhe ueparLmenL of llnance ln
llgure 3.1 and Lo Lhe laLesL esLlmaLes from oLher lnsLlLuLlons ln llgure 3.2.
ll Cu8L 3. 1 CCMA8l SCn Cl uLA81MLn1 Cl ll nAnCL S18uC1u8AL 8AL AnCL
LS1l MA1LS lC8 l 8LL Anu

103
1he 1reaLy on SLablllLy, CoordlnaLlon and Covernance ln Lhe Lconomlc and MoneLary unlon (1SCC), known as Lhe
llscal CompacL, sLaLes ln ArLlcle 3.1 (b) LhaL 1he ConLracLlng arLles shall ensure rapld convergence Lowards Lhelr
respecLlve medlum-Lerm ob[ecLlve. 1he Llme-frame for such convergence wlll be proposed by Lhe Luropean
Commlsslon Laklng lnLo conslderaLlon counLry-speclflc susLalnablllLy rlsks".
-9
-8
-7
-6
-3
-4
-3
-2
-1
0
2012 2013 2014 2013 2016

o
f

C
u

8udgeL 2014 Su 2013
8udgeL 13 Su 12

63

ll Cu8L 3. 2 CCMA8l SCn Cl LA1LS1 S18uC1u8AL 8AL AnCL LS1l MA1LS
lC8 l 8LL Anu

1he ueparLmenL of llnance esLlmaLes of Lhe sLrucLural budgeL balance are relevanL Lo assessmenL
of compllance wlLh Lhe 8udgeLary 8ule as seL ouL ln Lhe lkA, alLhough Lhe Lu rules (and compllance
wlLh Lhe prevenLaLlve arm of Lhe SC) conLlnue Lo be assessed relaLlve Lo Luropean Commlsslon
esLlmaLes, as dlscussed ln Lhe prevlous llscol Assessmeot kepott.
104

LfforLs Lo lmprove Lhe ueparLmenL of llnance and Lu meLhodologles are welcome. A more
comprehenslve seL of meLhodologles ls needed ln lreland Lo lmprove Lhe undersLandlng of Lhe
cycllcal poslLlon of Lhe economy and Lhe publlc flnances.
3. 2 . 2 CCM L l AnC L Wl 1 P C1 PL 8 l 8 l S P A nu L u l l S C AL 8uL L S
1he Councll has no formal mandaLe Lo monlLor Lhe lrlsh uebL 8ule and Lu flscal rules.
103
Powever,
lL ls requlred ln lLs assessmenL of Lhe flscal sLance Lo lnclude .reference Lo Lhe provlslons of Lhe
SLablllLy and CrowLh acL".
ln Lerms of compllance wlLh oLher lrlsh and Lu rules:
! lreland remalns sub[ecL Lo an Lu Lxcesslve ueflclL rocedure (Lu) as Lhe Ceneral CovernmenL
deflclL exceeds Lhe Lhree per cenL of Cu deflclL crlLerlon of Lhe SC. Powever, lreland ls

104
See ChapLer 3, SecLlon 3 of Aprll 2013 llscal AssessmenL 8eporL.
103
lndependenL monlLorlng of compllance wlLh Lhe 8udgeLary 8ule ls a requlremenL of Lhe Lu llscal CompacL buL Lhls
obllgaLlon does noL cover Lhe domesLlc uebL 8ule.
-8
-7
-6
-3
-4
-3
-2
-1
0
2012 2013 2014 2013 2016

o
f

C
u

8udgeL 2014 Lu Commlsslon (nov, 2013)
lMl (CcL, 2013) CLCu (!une, 2013)
66

complylng wlLh lLs obllgaLlons Lo brlng down Lhe deflclL under Lhe Lu and Lhe 1rolka
programme. 8oJqet 2014 pro[ecLlons show Lhe headllne deflclL ls expecLed Lo fall Lo 2.9 per
cenL of Cu by 2013, leavlng almosL no margln Lo accommodaLe negaLlve shocks. 1he
requlremenL of progress Lowards Lhe M1C ls effecLlvely Lhe same as under Lhe Ad[usLmenL
aLh CondlLlon of 8udgeLary 8ule and would Lherefore be meL. lf Lhe 3 per cenL llmlL were Lo
be breached, Lhe Luropean Commlsslon would Lhen assess wheLher effecLlve acLlon" had
been Laken (condlLlonal compllance") uslng a range of crlLerla before maklng a
recommendaLlon Lo Lhe Lu Councll for a declslon.
106, 107
1he Lu Councll may exLend Lhe
deadllne for deflclL correcLlon, usually by one year. Whlle such an exLenslon ls noL auLomaLlc,
and new nomlnal and sLrucLural LargeLs may be lnLroduced, a number of counLrles have had
Lhelr Lu deadllnes exLended earller Lhls year. lf effecLlve acLlon ls [udged noL Lo have been
Laken, Lhls wlll lead Lo a flne, Lyplcally of Lhe order of 0.2 per cenL of Lhe prevlous year's Cu,
payable Lo Lhe LSM.
108

! uebL remalns hlgher Lhan Lhe uebL 8ule" and SC debL crlLerlon requlremenLs of 60 per cenL of
Cu and Lhe Lu benchmark for convergence Lowards Lhe debL crlLerlon (see Annex l). 1hese
requlremenLs do noL apply whlle lreland ls sub[ecL Lo Lhe Lu and Lhls wlll be followed by a
LranslLlon perlod of Lhree years.
! 1he Lu has an expendlLure benchmark LhaL real non-lnLeresL expendlLure growLh, neL of cerLaln
componenLs of expendlLure (see 8ox l), should noL exceed Lhe growLh ln poLenLlal Cu plus Lhe
relevanL Cu deflaLor, excepL lf fully offseL by dlscreLlonary revenue lncreases, less an
addlLlonal margln Lo ensure LhaL Lhe sLrucLural budgeL balance converges Lo Lhe M1C. As shown
ln 8ox l, Lhe expendlLure benchmark lmplles LhaL Lhls spendlng should fall by aL leasL 0.7 per
cenL ln real Lerms over each of Lhe nexL Lhree years. 1hls would be meL under currenL offlclal
pro[ecLlons ouL Lo 2016.

106
hLLp://ec.europa.eu/economy_flnance/economlc_governance/sgp/pdf/30_edps/104-07_councll/2010-12-
07_le_126-7_councll_en.pdf
107
An analysls of effecLlve acLlon ls underLaken by Lhe Luropean Commlsslon and lncorporaLes an assessmenL of Lhe
lmpacL of forecasL errors on Lhe seLLlng of Lhe lnlLlal LargeLs. 1hls approach ls formallsed under Lhe reforms Lo Lhe SC
ln 2011 (see secLlon 2.3.2.1. of LC (2013c)). Cn flnallslng lLs assessmenL Lhe Luropean Commlsslon wlll Lhen make a
recommendaLlon Lo Lhe Lu Councll.
108
A flne may be cancelled on Lhe grounds of excepLlonal economlc clrcumsLances or followlng a reasoned requesL from
Lhe counLry wlLhln 10 days of Lhe Lu Councll declslon.

67

! Whlle Lhe exacL role of Lhe expendlLure benchmark ls sLlll somewhaL unclear, Lhe sLrucLural
balance appears Lo Lake precedence over Lhe expendlLure benchmark ln Lhe assessmenL of
progress Lowards Lhe M1C. 1he dlfferences ln meLhodology beLween Lhe M1C and Lhe
expendlLure benchmark allow for a more Lhorough assessmenL of compllance wlLh Lhe rules and
Lhe parLlcular facLors LhaL may lead Lo non-compllance. 1hls may be especlally lmporLanL lf Lhe
requlred M1C ls noL meL. ln Lhls case, meeLlng Lhe expendlLure benchmark could help wlLh
compllance wlLh Lu requlremenLs. 1here may also be dlfferences beLween compllance wlLh Lhe
expendlLure benchmark and ex post compllance wlLh M1C requlremenLs lf forecasL errors or
revlslons ln Lhe sLrucLural balance mean LhaL Lhe M1C requlremenLs are noL meL desplLe
sufflclenL dlsclpllne ln Lerms of spendlng.

109
lor example, ln Lhelr assessmenL of Lhe Cerman SLablllLy rogramme updaLe for 2013, Lhe Luropean Commlsslon sLaLes
LhaL Lhe growLh raLe of CovernmenL expendlLure, neL of dlscreLlonary revenue measures, wlll exceed Lhe reference
medlum-Lerm raLe of poLenLlal Cu growLh ln 2013. Powever, Lhe expendlLure benchmark ls noL blndlng glven LhaL lL ls
lnLended Lo underpln Lhe necessary ad[usLmenL Lowards Lhe M1C (whlch Cermany plans Lo conLlnue Lo comply wlLh).
Moreover, Lhe programme foresees LhaL Lhe growLh raLe of CovernmenL expendlLure wlll agaln be below Lhe reference
raLe ln 2014".
8Ck I : 1nL LU LkLNDI 1UkL 8LNCnMAkk
1he assessmenL by Lhe Lu of progress Lowards Lhe M1C uses Lhe sLrucLural balance as a
reference, buL also lncludes an analysls of expendlLure neL of dlscreLlonary revenue measures.
1he expendlLure benchmark ls Lherefore noL a rule" ln Lhe same sense as oLher requlremenLs
buL does need Lo be Laken lnLo conslderaLlon. lL ls consldered by Lhe Luropean Commlsslon Lo
be a complemenLary lndlcaLor Lo Lhe budgeLary rule. Speclflcally, Lhe expendlLure benchmark
ls an lmporLanL facLor ln Lhe overall assessmenL of compllance wlLh Lhe prevenLlve arm of Lhe
SLablllLy and CrowLh acL when a counLry ls noL aL lLs M1C.
109

1he expendlLure benchmark ls also deslgned as a complemenLary measure Lo ensure counLrles
sLay aL Lhelr M1Cs by provldlng guldance abouL how expendlLure should be seL Lo fulfll Lhe
ad[usLmenL paLh condlLlon and Lhen malnLaln Lhe sLrucLural budgeL balance aL Lhe M1C level
LhereafLer. 1hls ls belng applled ln lreland, where Lhe expendlLure benchmark ls belng used Lo
lnform Lhe seLLlng of Lhe mulLl-year expendlLure celllngs (see ChapLer 2).
1nL LkLNDI 1UkL 8LNCnMAkk
1he expendlLure benchmark essenLlally says LhaL annual expendlLure growLh should noL
exceed Lhe medlum-Lerm raLe of poLenLlal Cu growLh, unless Lhe excess ls maLched by
dlscreLlonary revenue measures. lf expendlLure lncreases ln a glven year aL Lhe medlum-Lerm
reference raLe of poLenLlal Cu, Lhe benchmark ensures LhaL Lhere ls no change ln
Lhe sLrucLural budgeL balance.
lor counLrles LhaL have noL reached Lhelr M1Cs, an addlLlonal convergence margln ls seL for
Lhe approprlaLe growLh raLe of expendlLure LhaL ls below Lhe medlum-Lerm raLe of poLenLlal
Cu growLh, as well as requlrlng LhaL any dlscreLlonary Lax cuLs are flnanced Lhrough lower
68

110
lL can be shown LhaL, lf revenues grow ln llne wlLh poLenLlal nomlnal Cu and lnLeresL spendlng ls consLanL as a
share of Cu, Lhe 0.3 percenLage polnL ad[usLmenL can be achleved by a convergence margln of 30/(prlmary
expendlLure as a percenLage of Cu).
spendlng or hlgher non-Lax revenues or boLh.
LxpendlLure ls measured excludlng lnLeresL, cycllcal unemploymenL beneflL spendlng and
Lxchequer co-flnanclng of Lu programmes, and lnvesLmenL cosLs are smooLhed over a four
year perlod.
1C CALCULA1L 1nL 8LNCnMAkk
1he medlum-Lerm raLe of poLenLlal Cu growLh ls calculaLed over a 10-year wlndow,
lncorporaLlng esLlmaLes for Lhe pasL 3 years of daLa, Lhe currenL year and forecasLs for Lhe
nexL 4 years from Lhe Luropean Commlsslon. 1hls wlll be re-calculaLed every Lhree years.
1he convergence margln ls subLracLed from Lhe medlum-Lerm growLh raLe. lL ls seL so LhaL Lhe
sLrucLural budgeL balance lmproves by 0.3 per cenL of Cu as requlred under Lhe ad[usLmenL
paLh condlLlon of Lhe M1C.
110
1he margln ls hlgher lf Lhe publlc secLor ls smaller because a
larger proporLlonal change ln spendlng ls needed Lo achleve a glven lmprovemenL ln Lhe
budgeL balance as a share of Cu. lor lreland, Lhe expendlLure benchmark would requlre
Ceneral CovernmenL expendlLure Lo decllne by 0.7 per cenL each year. 1hls reflecLs a low
medlum-Lerm raLe of 0.6 per cenL less a convergence margln of 1.4 per cenL.
I MLI CA1I CNS CI 1nL 8LNCnMAkk
ln prlnclple, Lhe expendlLure benchmark ls deslgned Lo achleve M1C-based requlremenLs and
Lherefore does noL add addlLlonal consLralnLs on pollcy, buL raLher shows whaL ls needed Lo
achleve requlremenLs for Lhe sLrucLural balance. lL lmplles LhaL real Ceneral CovernmenL
expendlLure wlll need Lo decllne ln nomlnal Lerms for some Llme. 1he scenarlos shown ln
ChapLer 4 develop Lhe lmpllcaLlons of Lhe M1Cs for expendlLure more sysLemaLlcally.
1here are, however, some cases where Lhe expendlLure benchmark and Lhe M1C could glve
dlfferenL slgnals:
! 1he expendlLure benchmark excludes lnLeresL paymenLs, whlle Lhe M1Cs are seL ln Lerms
of Lhe overall sLrucLural budgeL balance (lncludlng lnLeresL). 1hls can lead Lo dlfferences.
lor example lf spendlng on lnLeresL paymenLs falls as a share of Cu, Lhe M1C could be
achleved wlLhouL meeLlng Lhe expendlLure benchmark.
! 1he expendlLure benchmark uses a dlfferenL (10 year average) measure of poLenLlal ouLpuL
Lhan Lhe assessmenL of progress Lowards Lhe M1C ln a glven year, agaln creaLlng
posslblllLles of dlfferenL slgnals. lor example, Lhe backward-looklng elemenL of Lhe
medlum-Lerm poLenLlal growLh calculaLlon ln Lhe expendlLure rule could lmply a weaker
growLh number Lhan LhaL used Lo derlve Lhe M1C and Lherefore Lhe expendlLure
benchmark could requlre a more poslLlve budgeL balance.
! 1he cycllcal ad[usLmenL of Lhe budgeL balance could be affecLed by measuremenL or
forecasLlng errors, leadlng Lo a shorLfall ln Lhe M1C desplLe compllance wlLh Lhe
expendlLure benchmark.
! 1he M1Cs are seL ln sLrucLural Lerms and are neL of one-off and oLher Lemporary

69

3. 3 1PL Lu 1WC AC k"
1he so-called 1wo ack" of new Lu flscal regulaLlons came lnLo force on 30 May 2013.
111
1hls
secLlon seLs ouL Lhe maln feaLures of Lhese new rules and focuses speclflcally on Lhe new
endorsemenL funcLlon lL adds Lo Lhe Councll's mandaLe.
1he 1wo ack" largely deals wlLh lnsLlLuLlons and procedures Lo sLrengLhen flscal governance ln
Lhe Luro Area and reduce flscal and flnanclal rlsks.
1he maln elemenLs of Lhls leglslaLlon are (LC, 2013b):
! All Luro Area counLrles wlll follow a common budgeLary Llmellne wlLh a drafL 8udgeL by 13
CcLober and Lhe 8udgeL leglslaLed by Lhe end of Lhe year. ln lreland, Lhls has requlred movlng
Lhe 8udgeL process Lo earller ln Lhe year. 1here ls a new coordlnaLed Lu survelllance exerclse
ln Lhe auLumn and new reporLlng requlremenLs, allowlng Lhe Commlsslon Lo submlL an
oplnlon on Lhe drafL budgeL.
! 1he macroeconomlc forecasLs underplnnlng Lhe 8udgeL and Lhe SLablllLy rogramme updaLes
musL elLher be made lndependenLly or endorsed by lndependenL bodles. ln lreland, as
dlscussed ln ChapLer 1, Lhe Councll has been asslgned Lhe role of endorslng Lhe forecasLs
produced by Lhe ueparLmenL of llnance.

111
lormally, (1) Lu 8egulaLlon no 473/2013 on common provlslons for monlLorlng and assesslng drafL budgeL plans and
ensurlng Lhe correcLlon of excesslve deflclL of Lhe Member SLaLes ln Lhe Luro Area, and (2) 8egulaLlon no 472/2013 on
Lhe sLrengLhenlng of economlc and budgeLary survelllance of Members SLaLes ln Lhe Luro Area experlenclng or
LhreaLened wlLh serlous dlfflculLles wlLh respecL Lo Lhelr flnanclal sLablllLy.
measures. Such one-off ad[usLmenLs are noL applled Lo Lhe calculaLlon of Lhe expendlLure
benchmark.
Clven recenL revlslons Lo esLlmaLes of Lhe ouLpuL gap and poLenLlal ouLpuL, Lhe locklng ln of
currenL expendlLure benchmarks based on esLlmaLes ln sprlng 2013 for Lhree years may mean
LhaL expendlLure growLh ls more consLralnlng Lhan necessary Lo fulfll Lhe ad[usLmenL paLh
condlLlons Lo Lhe M1C Lhan more up-Lo-daLe esLlmaLes would suggesL.
MeeLlng Lhe expendlLure benchmark wlll noL only be challenglng durlng Lhe ad[usLmenL Lo Lhe
M1C, buL requlres spendlng Lo be neuLral wlLh respecL Lo Lhe cycle LhereafLer. Clven LhaL Lhe
wage blll ls a large share of CovernmenL spendlng, publlc secLor wages may need Lo be
decoupled from Lhe cycle. 1hls could be dlfflculL Lo achleve. AlLernaLlvely, oLher forms of
spendlng could be made more sLrongly counLer-cycllcal or dlscreLlonary Lax lncreases could be
made when Lhe economy ls growlng fasLer Lhan Lrend.
70

! lndependenL bodles musL monlLor compllance wlLh Lhe domesLlc flscal rules puL ln place
under Lhe Lu llscal CompacL.
112
ln lreland, Lhe Councll's mandaLe already lncluded monlLorlng
Lhe 8udgeLary 8ule, as well as a role ln Lhe operaLlon of Lhe auLomaLlc correcLlon mechanlsm
ln Lhe case LhaL Lhe rule ls noL meL.
! 1he obllgaLlon for Luro Area counLrles LhaL enLer Lxcesslve ueflclL rocedures (Lu) ln Lhe
fuLure Lo submlL an Lconomlc arLnershlp rogramme descrlblng Lhe sLrucLural reform
measures LhaL wlll conLrlbuLe Lo exlLlng Lhe Lu.
! 8eLLer coordlnaLlon of naLlonal debL lssuance plans Lhrough new reporLlng obllgaLlons.
! SLronger monlLorlng and survelllance procedures for Luro Area counLrles experlenclng or
LhreaLened wlLh serlous flnanclal sLablllLy dlfflculLles.

112
1reaLy on Lhe SLablllLy, CoordlnaLlon and Covernance ln Lconomlc and MoneLary unlon (1SCC).
Assessmeot of tbe llscol 5tooce

71

4. ASSLSSMLn1 Cl 1PL llSCAL S1AnCL
SUMMAk
! 1he planned flscal sLance for 2014 and 2013 ls assessed Lo be conduclve Lo prudenL economlc
and budgeLary managemenL". Powever, Lhe Councll remalns of Lhe vlew LhaL Lhe mosL
approprlaLe pollcy for 8oJqet 2014 was Lo conLlnue wlLh Lhe prevlously planned ad[usLmenL of
t3.1 bllllon raLher Lhan Lhe reduced amounL of t2.3 bllllon. 1he maln argumenLs ln favour of Lhe
larger ad[usLmenL are Lhe value of a margln of safeLy ln meeLlng Lhe key Lu deflclL LargeLs ln a
hlghly uncerLaln growLh envlronmenL and Lhe credlblllLy galns LhaL come wlLh successfully
dellverlng on prevlously announced ad[usLmenL plans.
! 1here should be no reducLlon ln Lhe prevlously announced dlscreLlonary ad[usLmenLs of t2
bllllon for 2013. 1o relnforce credlblllLy galns, any fuLure upward revlslons ln growLh pro[ecLlons
should be used Lo provlde a margln of safeLy Lo ensure LhaL Lhe key Lu deflclL celllng of 2.9 per
cenL of Cu for 2013 ls complled wlLh. AddlLlonal ad[usLmenLs may be requlred Lo ensure Lhe
LargeL ls achleved lf growLh pro[ecLlons are reduced or oLher conLlngencles ralse Lhe pro[ecLed
deflclL for 2013.
! 1he flscal ad[usLmenL programme ls worklng ln Lerms of sLablllslng Lhe publlc flnances and
resLorlng Lhe credlLworLhlness of Lhe SLaLe. MarkeL percepLlons of soverelgn defaulL rlsk have
fallen sharply. SlmulaLlons lndlcaLe LhaL ln Lhe absence of flscal ad[usLmenL from 2008 Lo 2013,
Lhls year's deflclL would have been close Lo 20 per cenL of Cu wlLh Lhe debL raLlo close Lo 160
per cenL of Cu (and rlslng).
! LxLended pro[ecLlons ouL Lo Lhe end of Lhe decade lndlcaLe LhaL Lhe mosL dlfflculL phase of Lhe
ad[usLmenL - whlch has lnvolved large annual nomlnal expendlLure and revenue changes -
should be broadly compleLe ln 2013/2016. ModesL lncreases ln nomlnal expendlLure should be
feaslble posL-2016, whlle meeLlng all domesLlc and Luropean flscal rules. Powever, Lhe exLenL of
Lhe LlghLness of Lhe flscal sLance should noL be underesLlmaLed, as Lhe scope for real
expendlLure lncreases wlll be llmlLed. SlgnlflcanL rlsks also surround Lhls scenarlo glven Lhe
lengLh of Lhe pro[ecLlon horlzon.
72

! As well as flscal ad[usLmenL, varlous self-proLecLlon" sLraLegles could be used Lo mlnlmlse Lhe
rlsks Lo fuLure borrowlng capaclLy. A precauLlonary credlL llne wlLh reasonable Lerms and
condlLlons would have provlded valuable addlLlonal proLecLlon agalnsL renewed fundlng
pressures as lreland exlLs Lhe Lu/lMl asslsLance programme. 1wo furLher self-proLecLlon"
sLraLegles are also examlned: exLendlng and smooLhlng Lhe maLurlLy proflle of Lhe debL and
holdlng cash reserves. Lach of Lhese self-proLecLlon sLraLegles lnvolves cosLs as well as beneflLs,
and Lhe opLlmal approach ls llkely Lo have lnvolved a mlx of all Lhree.
1he seLLlng of flscal pollcy durlng Lhe crlsls has requlred a dlfflculL balanclng of Lhe need Lo supporL
domesLlc demand/employmenL, Lhe need Lo resLore Lhe SLaLe's credlLworLhlness and Lhe need Lo
puL Lhe publlc flnances on a susLalnable paLh. Whlle Lhe CovernmenL faces a Lrade-off beLween
demand supporL and credlLworLhlness/susLalnablllLy ln Lhe shorL Lo medlum Lerm, reduclng Lhe
percelved rlsk of defaulL and unsLable debL dynamlcs ls crlLlcal Lo laylng a sLable foundaLlon for
longer-Lerm growLh and employmenL.
113

1hls chapLer Lakes up a number of lssues relevanL Lo Lhe Lrade-off and Lhus Lhe Councll's
ldenLlflcaLlon of Lhe approprlaLe flscal sLance. ln Lhe nexL secLlon, we flrsL assess Lhe CovernmenL's
planned flscal sLance ouL Lo 2013 as seL ouL ln 8oJqet 2014 and lasL Aprll's 5toblllty ltoqtomme
upJote (5lu, 201J). As requlred under Lhe llscol kespooslblllty Act, an assessmenL ls provlded as Lo
wheLher Lhe CovernmenL's flscal sLance ls ...conduclve Lo prudenL economlc and budgeLary
managemenL". A number of broader lssues relaLlng Lo Lhe conducL and prospecLs for flscal pollcy
over Lhe nexL number of years are Lhen Laken up.
lL ls ofLen clalmed LhaL ausLerlLy ls noL worklng". lf Lhe deflnlLlon of worklng" ls LhaL flscal
ad[usLmenL ls leadlng Lo fasLer shorL-Lerm growLh, Lhen such clalms are almosL cerLalnly [usLlfled.

113
Much of Lhe lnLernaLlonal dlscusslon of Lhe Lrade off beLween demand and credlLworLhlness/susLalnablllLy focuses
on counLrles wlLh an lndependenL cenLral bank and moneLary pollcy, buL faclng a zero lower bound on nomlnal lnLeresL
raLes. 1he Lrade off ls llkely Lo be conslderably more benlgn ln Lhe conLexL of an lndependenL moneLary pollcy and a
zero lower bound for Lwo reasons. llrsL, percepLlons of defaulL rlsk appear Lo be conslderably lower where a cenLral
bank can prlnL money Lo meeL debL obllgaLlons ln exLremls. 1he ablllLy Lo use quanLlLaLlve easlng Lype pollcles can also
lower flnanclng cosLs Lo Lhe consolldaLed CovernmenL. 1he dlfferenL level of bond markeL pressure faced by Lhe unlLed
klngdom durlng Lhe crlsls - whlch has a deflclL and debL raLlo noL Loo dlsslmllar Lo lrelands - ls a case ln polnL. Second,
Lhe operaLlon of an lndependenL moneLary pollcy glves Lhe counLry Lhe scope Lo offseL Lhe negaLlve lmpacL of flscal
LlghLenlng when Lhe counLry ls no longer consLralned by Lhe zero lower bound. 1hls can creaLe a slgnlflcanL asymmeLry
beLween Lhe cosLs of flscal LlghLenlng Loday (when Lhe zero lower bound ls blndlng) and laLer (when lL ls noL), lncreaslng
Lhe relaLlve aLLracLlveness of back-loaded flscal ad[usLmenL. lor a small counLry ln a large moneLary unlon, laLer
moneLary pollcy can largely be vlewed as exogenous Lo lLs flscal pollcy.

73

1he avallable evldence on mulLlpllers suggesLs LhaL flscal ad[usLmenL does slow Lhe economy ln Lhe
shorL Lerm (llAC, 2013a). Powever, Lhe core lnsLrumenLal purpose of Lhe ad[usLmenL ls Lo puL Lhe
publlc flnances on a susLalnable paLh and ensure Lhe borrowlng capaclLy of Lhe SLaLe. Whlle Lhe
dlrecL shorL-Lerm effecLs on growLh are llkely Lo be negaLlve, malnLalnlng borrowlng capaclLy -
boLh from markeL and offlclal sources - ls essenLlal:
! Lo allow Lhe ad[usLmenL Lo be phased over Llme (foresLalllng Lhe need for even greaLer
ad[usLmenL),
! Lo avold a dlsrupLlve SLaLe defaulL,
! Lo supporL access Lo affordable fundlng for Lhe banklng sysLem, and
! Lo underpln long-Lerm susLalnable growLh.
ln SecLlon 4.3, Lhe self-defeaLlng ausLerlLy" argumenL ls examlned uslng Lhe Councll's llscal
leedbacks model Lo compare Lhe acLual evoluLlon of key flscal and credlLworLhlness varlables slnce
lreland's flscal ad[usLmenL began wlLh predlcLed ouLcomes under Lhe counLerfacLual scenarlo of no
ad[usLmenL.
AnoLher worry concernlng Lhe currenL flscal ad[usLmenL sLraLegy ls LhaL lL wlll be so prolonged LhaL
lL ls noL economlcally or pollLlcally feaslble. Such expecLaLlons of unendlng ausLerlLy sap confldence
and also Lhe credlblllLy of Lhe ad[usLmenL programme lLself. 8ulldlng on work done by Lhe
ueparLmenL of llnance ln 5lu 201J, SecLlon 4.4 looks ahead Lo Lhe flscal ad[usLmenLs LhaL are
llkely Lo be requlred Lo ensure compllance wlLh all flscal rules posL-2013.
1he revealed fraglllLy of lreland's credlLworLhlness wlLhln Lhe moneLary unlon ls llkely Lo be an
endurlng consLralnL on lrlsh flscal pollcy maklng. urawlng ln parL on Lhe experlence of emerglng
markeLs LhaL have faced sudden sLops" of caplLal lnflows, SecLlon 4.3 examlnes self-proLecLlon
sLraLegles - ln addlLlon Lo reduclng Lhe deflclL and debL - LhaL offer Lhe poLenLlal Lo reduce Lhe
vulnerablllLy of fuLure markeL access.

74

4. 2 8L vl L W Cl 1 PL ll S C AL S1 AnCL
ln Lhls secLlon, recenL developmenLs affecLlng Lhe demand/credlLworLhlness Lrade-off are flrsL
brlefly revlewed. 1he approprlaLeness of Lhe planned flscal sLance for 2014-2013 ls Lhen assessed.
1he currenL offlclal esLlmaLe of Lhe ouLpuL gap-Lhe dlfference beLween acLual and poLenLlal Cu
expressed as a percenLage of poLenLlal Cu-ls -3.3 per cenL for 2013 (see ChapLer 3). As a resulL of
changes Lo esLlmaLes of Lhe underlylng equlllbrlum unemploymenL raLe (or non-acceleraLlng wage
raLe of unemploymenL, nAW8u), Lhe ueparLmenL of llnance has slgnlflcanLly revlsed lLs esLlmaLes
and pro[ecLlons of Lhe ouLpuL gap compared Lo Lhose provlded ln 5lu 201J.
114
8oLh seLs of ouLpuL
gap numbers are shown ln llgure 4.1 and were dlscussed ln ChapLer 3.
Accordlng Lo 5lu 201J Lhe ouLpuL gap was pro[ecLed Lo Lurn poslLlve ln 2014. As dlscussed ln Lhe
lasL llscol Assessmeot kepott (llAC, 2013a, ChapLer 3), Lhe Councll dld noL flnd Lhese ouLpuL gap
esLlmaLes and pro[ecLlons Lo be plauslble. Cne lndlcaLlon LhaL Lhe prevlous offlclal numbers
undersLaLed Lhe slze of Lhe real Cu shorLfall was Lhe Luropean Commlsslon's pro[ecLlon LhaL Lhe
nAW8u would rlse Lo close Lo 16 per cenL by 2017. 1hls vlew was noL shared by experLs on Lhe lrlsh
labour markeL (see, e.g., LS8l 2013, MeJlom-1etm kevlew). 1he ueparLmenL of llnance had also
lLself expressed reservaLlons abouL Lhe esLlmaLed slze of Lhe currenL and pro[ecLed ouLpuL gap LhaL
resulLs from Lhe use of Lhe Lu meLhodology (see, e.g., 5lu 201J).
ll Cu8L 4. 1: LS1l MA1LS Anu 8C! LC1l CnS Cl l 8LLAnu' S Cu1u1 CA

Note. A negaLlve ouLpuL gap lndlcaLes acLual real Cu ls below poLenLlal real Cu.

114
1he ueparLmenL of llnance uses a common Lu meLhodology ln esLlmaLlng poLenLlal ouLpuL and Lhe assoclaLed
ouLpuL gap.
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
2012 2013 2014 2013 2016

Su 2013 lMl 11Lh 8evlew 8udgeL 2014

73

1he new ueparLmenL of llnance ouLpuL gap esLlmaLes and pro[ecLlons are now closer Lo Lhose
provlded by Lhe lMl, alLhough Lhey are more pesslmlsLlc (see llgure 4.1). 1hey show an economy
LhaL ls slgnlflcanLly underperformlng relaLlve Lo lLs poLenLlal, and ls llkely Lo conLlnue Lo do so over
Lhe nexL number of years. 1he ouLpuL gap ls now pro[ecLed Lo sLlll be aL a level of -2.3 per cenL of
poLenLlal Cu ln 2016. 1hls underperformance ls ln slgnlflcanL parL due Lo weak domesLlc demand
ln Lhe conLexL of a balance sheeL recesslon (see ChapLer 1). Lacklng a counLry-speclflc moneLary
pollcy lnsLrumenL, sLandard demand managemenL conslderaLlons would Lend Lo favour a delay of
flscal ad[usLmenL measures ln Lhe absence of oLher consLralnLs.
unforLunaLely, oLher consLralnLs are presenL. Cne consLralnL ls Lhe need Lo ensure LhaL Lhe debL Lo
Cu raLlo ls on a susLalnable paLh. under Lhe exLended pro[ecLlons ouL Lo Lhe end of Lhe decade
from 5lu 201J, Lhls raLlo ls expecLed Lo peak Lhls year and Lhen begln Lo fall. Powever, glven Lhe
volaLlllLy of lrlsh growLh and resulLlng hlgh forecasL errors, Lhere ls no guaranLee LhaL debL ls on a
susLalnable paLh. llgure 4.2 reproduces Lhe debL raLlo fan charL from ChapLer 2. Lach band
represenLs 10 per cenL of Lhe dlsLrlbuLlon. 1he charL lndlcaLes LhaL Lhere ls a 1-ln-3 probablllLy LhaL
Lhe debL raLlo wlll fall Lo sLablllse by 2013 under currenL flscal plans.
ll Cu8L 4. 2: uL81 1C Cu 8A1l C lAn CPA81

Lven Lhe reasonable llkellhood of a sLable or decllnlng debL raLlo under flscal plans mlghL noL be
sufflclenL Lo ensure Lhe credlLworLhlness and consequenL borrowlng capaclLy of Lhe SLaLe. 1hls can
reflecL doubLs abouL Lhe CovernmenL's capaclLy Lo avold a fuLure defaulL.
113
1hls ln Lurn may

113
1hls ls an example of Lhe well known Llme-lnconslsLency of opLlmal CovernmenL plans (see kydland and rescoLL,
1977, for Lhe classlc exposlLlon). A CovernmenL may sLaLe lLs lnLenLlon Lo pursue flscal pollcles LhaL wlll ensure Lhe
avoldance of defaulL. lf such plans are credlble, expecLaLlons of defaulL wlll be low and allow Lhe CovernmenL Lo borrow
60
70
80
90
100
110
120
130
140
130
2011 2012 2013 2014 2013 2016

o
f

C
u

76

necesslLaLe a LlghLer flscal sLance Lhan would be warranLed by purely demand-managemenL
conslderaLlons ln order Lo underpln Lhe credlblllLy of Lhe SLaLe's capaclLy Lo avold defaulL. 1he
dlfflculL Lrade-off beLween demand and susLalnablllLy/credlLworLhlness has made flscal pollcy
maklng ln recenL years exLremely challenglng.
ln lreland's case, markeL percepLlons of defaulL rlsk rose sLeadlly from 2010 Lhrough Lhe flrsL half of
2011 (see llgure 4.3). Powever, successful lmplemenLaLlon of flscal ad[usLmenL efforLs comblned
wlLh lmprovemenLs ln offlclal supporLs have subsLanLlally lowered Lhe yleld spread beLween lrlsh
and Cerman bonds. As a resulL, markeL percepLlons of soverelgn rlsk defaulL have fallen sharply.
1he pollcy challenge now ls Lo susLaln Lhe lmprovemenL ln credlLworLhlness and borrowlng capaclLy
whlle llmlLlng Lhe conLracLlonary drag caused by LlghL flscal pollcles ln a balance-sheeL recesslon.

ll Cu8L 4. 3: l 8l SP Anu CL8MAn 10- ?LA8 8Cnu ?l LL uS

aL low lnLeresL raLes. Powever, Lhe laLer flscal ad[usLmenL pollcles requlred Lo avold defaulL could be hlghly cosLly, and
Lhe CovernmenL mlghL choose subsequenLly Lo defaulL, even where Lhe cosLs of Lhe defaulL are Lhemselves hlgh.
8ecognlslng Lhls laLer lncenLlve, Lhe announced plans may noL be credlble. 1o reduce expecLaLlons of defaulL Lhe
CovernmenL can aLLempL Lo change Lhe expecLed ex post cosLs and beneflLs of defaulL. uLLlng Lhe debL raLlo on a lower
Lra[ecLory can reduce Lhe expecLed beneflLs of a defaulL. 1aklng dlfflculL acLlons now can also help slgnal Lhe
CovernmenL's sLrong lnLenLlon - and pollLlcal capaclLy - Lo Lake Lhe dlfflculL flscal acLlons requlred Lo avold defaulL.
CLher acLlons LhaL Lhe CovernmenL can Lake Lo change percepLlons of Lhe laLer cosL-beneflL calculaLlon lnclude puLLlng
Lhe CovernmenL's repuLaLlon as a no-defaulL CovernmenL flrmly on Lhe llne (Lhus ralslng Lhe pollLlcal cosLs of defaulL),
puLLlng ln place a flscal framework of sLrong flscal rules and lnsLlLuLlons LhaL ralse Lhe pollLlcal cosLs of weak flscal
pollcles, and chooslng a debL sLrucLure LhaL ls cosLly Lo resLrucLure.
0
2
4
6
8
10
12
14
16
!
a
n
-
1
0

A
p
r
-
1
0

!
u
l
-
1
0

C
c
L
-
1
0

!
a
n
-
1
1

A
p
r
-
1
1

!
u
l
-
1
1

C
c
L
-
1
1

!
a
n
-
1
2

A
p
r
-
1
2

!
u
l
-
1
2

C
c
L
-
1
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!
a
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-
1
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A
p
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-
1
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!
u
l
-
1
3

C
c
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-
1
3

lreland
Cermany
5ootce. uaLasLream.

77

ln prevlous llscol Assessmeot kepotts, Lhe Councll argued for Lhe lmporLance of meeLlng LargeLs
under Lhe Lxcesslve ueflclL rocedure (Lu), and ln parLlcular for aLLalnlng a deflclL aL or below Lhe
Lu celllng of 2.9 per cenL of Cu ln 2013. 1hls ls a requlremenL for exlLlng Lhe Lu, whlch ls parL of
Lhe correcLlve arm of Lhe SLablllLy and CrowLh acL (SC). 1o enhance Lhe credlblllLy of Lhe flscal
sLance, and recognlslng Lhe uncerLalnLy surroundlng economlc growLh and oLher conLlngencles, an
argumenL was made for provldlng a margln of safeLy relaLlve Lo [usL meeLlng Lhe LargeL under Lhe
cenLral growLh forecasLs. 1he credlblllLy of Lhe sLance should furLher be enhanced by followlng
Lhrough on planned dlscreLlonary ad[usLmenLs. 1hese dlscreLlonary ad[usLmenLs are closely relaLed
Lo ad[usLmenLs ln Lhe sLrucLural deflclL, whlch are a key focus of boLh Lhe Luropean Commlsslon
and Lhe lMl.
ln response Lo an lmprovemenL ln forecasLs for Lhe Ceneral CovernmenL deflclL, parLly as a resulL
of Lhe promlssory noLes LransacLlon (see llAC, 2013a, and 8arnes and SmyLh, 2013), Lhe
CovernmenL made Lhe declslon ln 8oJqet 2014 Lo reduce Lhe t3.1 bllllon ln prevlously planned
ad[usLmenL Lo t2.3 bllllon. 1he Councll ln lLs mosL recenL reporL had urged LhaL Lhe LargeL of t3.1
bllllon be reLalned. 8ased on Lhe growLh forecasLs from 8oJqet 2014 - whlch have been endorsed
by Lhe Councll (see ChapLer 1) - Lhe planned ad[usLmenL seL ouL ln Lhe 8udgeL ls conslsLenL wlLh
keeplng Lhe deflclL aL Lhe Lu deflclL celllng of 2.9 per cenL of Cu ln 2013, and Lhus conslsLenL
wlLh meeLlng Lhls crlLerlon for exlL from Lhe Lu. Powever, Lhe Councll ls of Lhe vlew LhaL Lhe llkely
beneflL from reduclng Lhe planned ad[usLmenL for 8oJqet 2014 ln Lerms of lmproved shorL-Lerm
growLh (esLlmaLed Lo be approxlmaLely 0.2 percenLage polnLs of Cu) ls unllkely Lo have been
worLh Lhe cosL ln Lerms of Lhe ellmlnaLlon of Lhe margln of safeLy and lessened credlblllLy. Cverall,
however, glven LhaL Lhe Lu deflclL LargeL for 2013 ls expecLed Lo be meL, Lhe Councll conLlnues Lo
assess LhaL Lhe planned flscal sLance ls ...conduclve Lo prudenL economlc and budgeLary
managemenL".
Lven Lhough Lhe planned flscal sLance ls conslsLenL wlLh meeLlng Lhe Lu deflclL celllng for 2013
under Lhe 8oJqet 2014 forecasLs, lL leaves llmlLed room for adverse growLh shocks (as was ouLllned
ln ChapLer 2). 1he CovernmenL should lmplemenL Lhe t2 bllllon ln ad[usLmenLs prevlously
announced for 2013. Clven Lhe lmporLance, from a credlblllLy vlewpolnL, of meeLlng Lhe deflclL
celllng for 2013, lncreased ad[usLmenLs would llkely be requlred lf Lhere ls any maLerlal
deLerloraLlon ln Lhe growLh forecasLs or oLher deflclL/debL-affecLlng conLlngencles. Moreover, any
upward revlslons Lo growLh forecasLs should be used Lo resLore a valuable margln of safeLy ln
78

relaLlon Lo Lhe 2013 Lu deflclL celllng and Lo ensure LhaL Lhe debL-Cu raLlo remalns on a
susLalnable paLh.
4. 3 PAS ll S CAL Au! uS 1 ML n1 WC8 kL u 1 C S1 A8 l L l S L 1 PL u8 L l C ll nAnCL S Anu
8L S 1 C8L C8L ul 1 WC8 1 Pl nL S S ?
As dlscussed above, Lhe cholce of flscal sLance ln currenL clrcumsLances lnvolves a dlfflculL
balanclng acL of supporLlng domesLlc demand and credlbly sLablllslng Lhe publlc flnances. AlLhough
lL ls ofLen sLaLed LhaL Lhere ls a Lrade-off beLween growLh and ausLerlLy", dlscreLlonary flscal
ad[usLmenL - ausLerlLy - ls beLLer vlewed as Lhe lnsLrumenL avallable Lo pollcymakers Lo move
along Lhe domesLlc demand and susLalnablllLy/credlLworLhlness Lrade-off.
Much dlscusslon of approprlaLe flscal sLraLegy has essenLlally amounLed Lo a denlal LhaL Lhls Lrade-
off exlsLs. 1he denlals have Laken Lwo qulLe dlfferenL forms: Lhe expanslonary flscal conLracLlon
(LlC) hypoLhesls and Lhe self-defeaLlng flscal ad[usLmenL hypoLhesls. under Lhe LlC hypoLhesls,
dlscreLlonary flscal conLracLlons are assumed Lo lncrease growLh. 1hls mlghL happen, for example,
because flscal ad[usLmenLs reduce lnLeresL raLes or reduce fears of a dlsrupLlve SLaLe defaulL.
ulscreLlonary ad[usLmenLs would Lhen lead Lo lmproved flscal performance boLh dlrecLly and also
lndlrecLly Lhrough lmproved growLh performance. ln Lhe prevlous llscol Assessmeot kepott (llAC,
2013a), avallable evldence on Lhe slze of shorL-Lerm flscal mulLlpllers was revlewed. AlLhough Lhere
ls evldence LhaL shorL-Lerm mulLlpllers are lower when debL Lo Cu raLlos are hlgh, or Lhe counLry
ls ln a debL crlsls, Lhe welghL of Lhe evldence does noL supporL Lhe LlC hypoLhesls.
1he second way ln whlch Lhe Lrade-off mlghL noL exlsL ls lf dlscreLlonary flscal ad[usLmenLs are noL
worklng ln Lerms of lmprovlng Lhe flscal slLuaLlon and ulLlmaLely Lhe SLaLe's credlLworLhlness.
under such self-defeaLlng ausLerlLy", dlscreLlonary efforLs Lo curb Lhe deflclL would resulL ln boLh
lower growLh and a worsenlng ln Lhe key flscal aggregaLes. 1he remalnder of Lhls secLlon examlnes
posslble evldence of self-defeaLlng flscal ad[usLmenL ln Lhe lrlsh conLexL. lL conslders Lhe posL-2008
evoluLlon of key varlables: Lhe underlylng prlmary deflclL (l.e., Lhe prlmary deflclL excludlng
banklng-relaLed recaplLallsaLlon cosLs), Lhe underlylng Ceneral CovernmenL deflclL, Lhe debL Lo
Cu raLlo, and Lhe 10-year bond yleld.
An obvlous drawback of Lhls approach ls LhaL Lhe counLerfacLual - LhaL ls, how Lhese varlables
would have evolved ln Lhe absence of flscal ad[usLmenL - ls noL observable. 1he Councll's llscal

79

leedbacks model ls Lhus used Lo examlne how Lhe flscal varlables are llkely Lo have evolved ln Lhe
absence of dlscreLlonary ad[usLmenL.
116

llgures 4.4a Lo 4.4c show Lhe acLual/predlcLed evoluLlon of Lhe four varlables beLween 2009 and
2013. (llgure 4.3 prevlously showed Lhe evoluLlon of markeL assessmenLs of credlLworLhlness). 1he
predlcLlon for Lhe flscal varlables for 2013 ls Laken from 8oJqet 2014. uesplLe slgnlflcanL non-
ausLerlLy relaLed growLh headwlnds, Lhe underlylng prlmary deflclL has fallen from 9.2 per cenL of
Cu ln 2009 Lo a pro[ecLed 2.7 per cenL of Cu ln 2013. 1he underlylng acLual deflclL has fallen
from 11.2 per cenL of Cu Lo a pro[ecLed 7.3 per cenL of Cu over Lhe same perlod. Clven LhaL Lhe
CovernmenL was runnlng a prlmary deflclL over Lhls perlod and Lhe nomlnal lnLeresL raLe has
exceeded Lhe nomlnal growLh raLe, lL ls noL surprlslng LhaL Lhe debL Lo Cu raLlo has lncreased over
Lhe perlod. 1he lncrease ln Lhe debL Lo Cu raLlo has also reflecLed subsLanLlal supporLs Lo Lhe
banklng sysLem and lncreases ln Lhe SLaLe's cash reserves. ln Lerms of secondary markeL bond
ylelds, Lhe lmplled 10-year bond yleld lncreased sLeadlly unLll mld-2011, buL has fallen dramaLlcally
over Lhe lasL Lwo years.
As noLed, Lhe more lnLeresLlng quesLlon ls whaL would have happened Lo Lhese varlables ln Lhe
absence of flscal ad[usLmenLs. 1he LoLal dlscreLlonary ad[usLmenLs underLaken beLween 2009 and
2013 add up Lo approxlmaLely t28 bllllon. lor Lhe flscal varlables, a useful counLerfacLual scenarlo
can be run assumlng LhaL no dlscreLlonary ad[usLmenLs were underLaken. lL should be sLressed LhaL
Lhls scenarlo assumes LhaL growLh would have evolved ln Lhe same way as under Lhe acLual
scenarlo oLher Lhan Lhrough Lhe effecLs of Lhe dlscreLlonary flscal ad[usLmenL on growLh glven Lhe
assumed deflclL mulLlpller. 1he slmulaLlons also assume LhaL Lhe lnLeresL raLe on ouLsLandlng debL
would noL have been affecLed by Lhe absence of flscal ad[usLmenL. 1hese Lwo assumpLlons mean
LhaL Lhe slmulaLlons are llkely Lo underesLlmaLe Lhe levels Lhese flscal varlables would have reached
ln Lhe absence of Lhe dlscreLlonary ad[usLmenLs. Cf course, lL ls hlghly unllkely LhaL such a no-
ad[usLmenL" paLh would have been feaslble.
llgures 4.4a Lo 4.4c also show Lhe predlcLed counLerfacLual evoluLlons for Lhe Lhree flscal
aggregaLes ln Lhe absence of flscal ad[usLmenL. 1he underlylng prlmary deflclL would have rlsen Lo a

116
1hese slmulaLlons assume a reduced form deflclL mulLlpller of 0.3 and an auLomaLlc sLablllser coefflclenL of 0.3,
where Lhe laLLer ls based on new Luropean Commlsslon esLlmaLes of Lhls coefflclenL (Mourre et ol. 2013).
80

pro[ecLed 14 per cenL of Cu ln 2013.
117
1he underlylng acLual deflclL would have rlsen Lo 20 per
cenL of Cu. llnally, Lhe debL Lo Cu raLlo would have rlsen Lo a pro[ecLed 138 per cenL. 1aken
LogeLher, Lhese resulLs lndlcaLe LhaL, even under whaL could be vlewed as raLher opLlmlsLlc
assumpLlons, Lhe flscal ad[usLmenL efforL has noL been self defeaLlng ln Lerms of lmprovlng Lhe key
underlylng flscal aggregaLes.
118

AbsenL a credlble model of percelved credlLworLhlness, lL ls noL posslble Lo conducL a defenslble
counLerfacLual slmulaLlon of markeL assessmenLs of defaulL rlsk based on underlylng bond
spreads.
119
Powever, Lhe sharp reducLlon ln Lhe secondary markeL bond yleld does noL suggesL LhaL
Lhe flscal ad[usLmenL efforL has been self-defeaLlng on Lhls measure elLher. 1he comblnaLlon of Lhe
demonsLraLed capaclLy Lo galn conLrol of Lhe publlc flnances, LogeLher wlLh developmenLs ln
Luropean-level offlclal supporL pollcles (whlch are Lhemselves condlLlonal on flscal efforL), appears
Lo have supporLed a sharp fall ln percelved defaulL rlsk.
Cverall, Lhe evldence lndlcaLes LhaL Lhe flscal ad[usLmenLs pursued slnce Lhe crlsls erupLed ln 2008
are worklng Lo sLablllse Lhe publlc flnances and Lo resLore Lhe credlLworLhlness of Lhe SLaLe.

117
llgures 4.4a and 4.4b show Lhe underlylng prlmary and Ceneral CovernmenL deflclLs, LhaL ls, Lhe deflclLs excludlng
Lhe effecL of caplLal ln[ecLlons lnLo flnanclal lnsLlLuLlons as deflned by Lhe ueparLmenL of llnance.
118
Cne posslble ob[ecLlon Lo Lhese counLerfacLual slmulaLlons ls LhaL Lhe effecLs of dlscreLlonary flscal ad[usLmenL could
be non-llnear, wlLh posslbly larger mulLlpller effecLs aL Lhe margln. ln Lhe conLexL of Lhe llscal leedbacks model, lL
should be noLed LhaL dlscreLlonary ad[usLmenLs lmprove Lhe underlylng prlmary balance for any chosen (poslLlve)
deflclL mulLlpller. Powever, for large enough mulLlpllers, dlscreLlonary ad[usLmenLs could lead Lo a hlgher debL Lo Cu
raLlo for a perlod of Llme lf Lhe adverse effecLs on Lhe denomlnaLor Lhrough reduced growLh offseL Lhe poslLlve effecL
on Lhe numeraLor Lhrough an lmproved prlmary deflclL. lL ls useful, Lhen, Lo ask how large Lhe mulLlpller would have Lo
be for addlLlonal dlscreLlonary ad[usLmenL ln year L Lo acLually lead Lo a larger debL Lo Cu raLlo ln year L+1. We agaln
use Lhe llscal leedbacks model Lo examlne how large Lhe reduced-form mulLlpller would have Lo be for an addlLlonal t1
bllllon ln ad[usLmenLs ln 2014 Lo lead a hlgher debL Lo Cu raLlo ln 2013, all else equal. 1he mulLlpller would have Lo be
1.8 or larger - values LhaL are ln excess of any avallable esLlmaLe for lreland's deflclL mulLlpller glven Lhe openness of
Lhe economy.
119
Some emplrlcal models of Lhe rlsk premlum posLulaLe a slmple llnear relaLlonshlp beLween Lhe rlsk premlum and
currenL and/or lagged values of flscal varlables such as Lhe deflclL as a share of Cu and Lhe debL Lo Cu raLlo.
Powever, bond markeL lnvesLors are llkely Lo adopL a more forward looklng approach, and ln parLlcular Lo form
expecLaLlons of how flscal varlables wlll evolve ln Lhe fuLure ln an uncerLaln economlc and pollLlcal envlronmenL.
AnoLher compllcaLlon, furLher dlscussed ln SecLlon 4.3.2, ls LhaL Lhe rlsk premlum may be sub[ecL Lo mulLlple
expecLaLlons-based equlllbrla. 1hls can lead Lo dlsconLlnuous [umps ln Lhe premlum, even wlLh llmlLed changes ln
conLemporaneous flscal varlables. 1he experlence of a rapldly rlslng rlsk premlum beLween mld-2010 and mld-2011 ls a
case ln polnL, as ls Lhe subsequenL fall. AlLhough a rellable predlcLlve model ls Lhus dlfflculL Lo esLlmaLe, an
undersLandlng of Lhe broad forces leadlng Lo a good" equlllbrlum do polnL Lo Lhe lmporLance of Lhe credlblllLy of Lhe
planned deflclL- and debL-reducLlon sLance and percepLlons of Lhe CovernmenL's commlLmenL Lo avold defaulL. ln
SecLlon 4.3.2 we dlscuss furLher pollcles LhaL could lncrease Lhe robusLness of an equlllbrlum wlLh low percelved defaulL
rlsk.

81

ll Cu8L 4. 4a: 8l MA8? uLll Cl 1,
AC1uAL Anu CCun1L8lAC1uAL SCLnA8l C

ll Cu8L 4. 4b: CLnL8AL CCvL8nMLn1 uLll Cl 1,

9.2
7.3
3.6
4.3
2.7
13.6
13.7
14.2
14.3
14.1
0
3
10
13
20
2009 2010 2011 2012 2013

o
f

C
u

AcLual Scenarlo no Ad[usLmenL Scenarlo
11.2
10.6
8.9
8.2
7.3
13.3
17.0
17.7
18.7
19.6
0
3
10
13
20
2009 2010 2011 2012 2013

o
f

C
u

82

ll Cu8L 4. 4C: CLnL8AL CCvL8nMLn1 uL81 1C Cu 8A1l C,

4. 4 8L ? Cnu 2013: CL l C? 8L Cul 8 L ML n1 S Anu Lx1 L nuL u ll S C AL 8 C! L C1 l CnS
1he requlremenL Lo brlng Lhe deflclL Lo below 3 per cenL of Cu by 2013 has been Lhe focus of
much recenL flscal pollcy dlscusslon.
120
As 2013 nears and as Lhe rogramme ends, lL wlll be
lncreaslngly lmporLanL for Lhe CovernmenL Lo seL ouL lLs medlum-Lerm flscal plans for 2016 and
beyond. 1hls would provlde addlLlonal credlblllLy for fuLure pollcy acLlons, helplng Lo supporL
credlLworLhlness as Lhe CovernmenL reLurns Lo Lhe markeL, and greaLer cerLalnLy Lo consumers,
buslnesses and Lhe CovernmenL secLor abouL fuLure prospecLs.
1he domesLlc and Luropean flscal rules provlde a mlnlmum sLandard for fuLure pollcy, buL lL would
be useful for Lhe CovernmenL Lo arLlculaLe wheLher more amblLlous goals should be seL and whaL
meeLlng Lhese sLandards would acLually lmply ln Lerms of pollcy. Cf course, Lhe acLual slze of
requlred fuLure measures wlll depend on such facLors as fuLure growLh, lnLeresL raLes and any
reallsed cosLs assoclaLed wlLh conLlngenL llablllLles. 1hese rlsk facLors were dlscussed ln ChapLer 2.
1he 5lu 201J ouLllned an lllusLraLlve scenarlo for key flscal and economlc varlables Lo 2019. 1he
auLhors of Lhe scenarlo sLressed LhaL Lhe pollcy assumpLlons underlylng Lhe scenarlo were purely
lllusLraLlve and dld noL reflecL pollcy declslons. 1he lllusLraLlve scenarlo assumed no dlscreLlonary
Lax changes (and Lhus Lax revenues growlng aL Lhe same raLe as nomlnal Cu) and voLed nomlnal

120
1hls ls a requlremenL under Lhe Lxcesslve ueflclL procedure (Lu), whlch ls parL of Lhe correcLlve arm of Lhe SC.
64.4
91.2
104.1
117.4
124.1
67.1
98.7
118.3
140.4
137.8
0
23
30
73
100
123
130
173
2009 2010 2011 2012 2013

o
f

C
u


83

expendlLure growlng aL an average of one per cenL per annum, compared Lo assumed poslLlve
lnflaLlon of beLween one and Lwo per cenL. key flscal and economlc ouLcomes assoclaLed wlLh Lhls
scenarlo are reproduced ln Annex !.
1he scenarlo consldered ln 5lu 201J would be conslsLenL wlLh compllance wlLh all flscal rules. ln
parLlcular, ln 2019 Lhe sLrucLural budgeL balance ls pro[ecLed Lo show a surplus of one per cenL of
Cu (whlch compares wlLh Lhe Medlum 1erm Cb[ecLlve (M1C) of a balanced sLrucLural budgeL),
Lhe Ceneral CovernmenL deflclL shows a surplus of 0.8 per cenL of Cu (well below Lhe deflclL
celllng for Lhe correcLlve arm of Lhe SC), and Lhe debL Lo Cu raLlo ls below Lhe backward-looklng
benchmark of Lhe SC's new debL rule (see ChapLer 3 for deLalls on Lhese rules).
121

1hls secLlon Lakes Lhe ueparLmenL of llnance's lllusLraLlve scenarlo as a basellne and Lhen
examlnes Lhe lmpllcaLlons of alLernaLlve pollcy sLances uslng Lhe Councll's llscal leedbacks
model.
122

Cne feaLure of Lhe ueparLmenL's scenarlo ln 5lu 201J ls LhaL lL lnvolves a qulLe uneven ad[usLmenL
of Lhe sLrucLural balance across dlfferenL years, and also leads Lo overachlevemenL of Lhe requlred
sLrucLural balance under Lhe M1C seL for lreland under Lhe prevenLlve arm of Lhe SC and Lhe
domesLlc 8udgeLary 8ule.
123

1wo alLernaLlve pollcy scenarlos assoclaLed wlLh a smooLher ad[usLmenL paLh for Lhe sLrucLural
balance are examlned: lmprovemenLs of 0.3 percenLage polnLs of Cu per year and 0.73
percenLage polnLs of Cu per year. 1he resulLs are recorded ln llgure 4.3 and llgure 4.6. An
ad[usLmenL of 0.3 percenLage polnLs per year ln Lhe sLrucLural balance would sLlll leave an
esLlmaLed sLrucLural deflclL of roughly 1 per cenL of Cu ln 2019 (and Lhus fall Lo meeL Lhe M1C).

121
lL should be noLed LhaL Lhe ueparLmenL of llnance has recenLly revlsed lLs esLlmaLes and pro[ecLlons for Lhe ouLpuL
gap, whlch wlll have lmpllcaLlons for esLlmaLes and pro[ecLlons of Lhe sLrucLural budgeL balance (see ChapLer 3). As a
revlsed longer-Lerm scenarlo ls noL yeL avallable, Lhls secLlon uses Lhe 5lu 201J lllusLraLlve scenarlo as a basellne.
8ecognlslng LhaL Lhe revlsed ouLpuL gap esLlmaLes wlll, all else equal, lower Lhe pro[ecLed sLrucLural deflclL, Lhe
requlremenL Lo achleve a sLrucLural budgeL balance would be achleved earller Lhan ln Lhe lllusLraLlve scenarlo. All else
equal, Lhls would ralse Lhe feaslble expendlLure lncreases ln Lhe laLer years of Lhe scenarlo under Lhe assumpLlon of
mlnlmal compllance wlLh all flscal rules.
122
1he llscal leedbacks model lmpllclLly assumes an exogenous paLh for Lhe Cu deflaLor (or equlvalenLly no ouLpuL
gap Lerm ln Lhe hlllps curve for Cu deflaLor lnflaLlon), so LhaL changes ln Lhe nomlnal growLh raLe are equal Lo
changes ln Lhe real growLh raLe.
123
1he lllusLraLlve scenarlo ln Lhe 5lu 201J pro[ecLs LhaL Lhe sLrucLural balance wlll lmprove by 0.3 percenLage polnLs of
Cu ln 2016, 0.7 percenLage polnLs of Cu ln 2017, 1.3 percenLage polnLs of Cu ln 2018, and 1.4 percenLage polnLs of
Cu ln 2019.
84

An ad[usLmenL of 0.73 percenLage polnLs per year would brlng Lhe sLrucLural deflclL Lo roughly zero.
1he 3 per cenL deflclL llmlL and Lhe debL rule are complled wlLh under boLh pollcy scenarlos.
llgures 4.3 and 4.6 also show Lhe level of nomlnal dlscreLlonary budgeLary ad[usLmenLs requlred Lo
meeL Lhe LargeL for Lhe ad[usLmenL ln Lhe sLrucLural budgeL deflclL (see panel f ln each flgure). lor
Lhe lllusLraLlve scenarlo ln 5lu 201J, Lhe requlred dlscreLlonary ad[usLmenL ls equal Lo Lhe lncrease
ln nomlnal prlmary expendlLure (excludlng unemploymenL beneflL cosLs) glven Lhe assumpLlon of
no change ln Lax raLes.
124
lor Lhe oLher pollcy scenarlos, Lhe addlLlonal dlscreLlonary ad[usLmenL
requlred Lo reach Lhe alLernaLlve LargeLs for Lhe change ln Lhe sLrucLural balance ls calculaLed uslng
Lhe llscal leedbacks model.
123

ln Lhe Lhree scenarlos consldered, requlred dlscreLlonary ad[usLmenLs generally Lurn negaLlve ln
2016. ln oLher words, Lhe slmulaLlons suggesL LhaL modesL lncreases ln nomlnal dlscreLlonary
expendlLure are feaslble posL-2013 conslsLenL wlLh compllance wlLh Lhe flscal rules. Powever, Lhe
exLenL of Lhe LlghLness of Lhe flscal sLance should noL be underesLlmaLed glven Lhe assumed
poslLlve lnflaLlon of beLween 1 and 2 per cenL per year over Lhe perlod 2016 Lo 2019.
Cn Lhe assumpLlon LhaL Lax raLes remaln unchanged, we can calculaLe Lhe lmplled feaslble
percenLage lncreases ln nomlnal and real prlmary expendlLure (excludlng cycllcal unemploymenL
beneflL expendlLures).
126
1hese are shown ln 1able 4.1. lL musL be underllned LhaL Lhe resulLs are
based on speclflc assumpLlons relaLlng Lo growLh and oLher conLlngencles. Powever, lf Lhese
assumpLlons are meL, Lhese scenarlos lndlcaLe LhaL Lhe mosL dlfflculL phase of Lhe flscal ad[usLmenL
should be broadly compleLe ln 2013/2016.

124
1hls assumes LhaL Lhere ls no feedback oLher Lhan Lhrough Lhe cosL of unemploymenL beneflLs from Lhe sLaLe of Lhe
economy Lo Lhe level of prlmary expendlLure. ln oLher words, Lhe acLual change ln prlmary expendlLure (excludlng
unemploymenL beneflLs) ls assumed Lo be equal Lo Lhe dlscreLlonary change ln prlmary expendlLure (excludlng
unemploymenL beneflLs).
123
1he requlred dlscreLlonary ad[usLmenL under each alLernaLlve pollcy scenarlo ls equal Lo Lhe requlred ad[usLmenL
under Lhe basellne ln 5lu 201J and any addlLlonal ad[usLmenL (poLenLlally negaLlve) due Lo Lhe change ln pollcy
assumpLlon relaLlve Lo Lhe basellne.
126
1he Cu deflaLor ls used Lo lnfer pro[ecLed lncreases ln real expendlLure. ro[ecLlons of Lhe lnflaLlon raLe (as
measured by Lhe consumer prlce lndex) ouL Lo 2019 were noL provlded ln 5lu 201J.

83

ll Cu8L 4. 3: ASSuMLu AnnuAL Au! uS1MLn1 l n
S18uC1u8AL uLll Cl 1 = 0. 3 L8CLn1ACL Cl n1S, 2016 - 2019.
ALL C1PL8 ASSuM1l CnS A8L AS l n 5lu 201J l LLuS18A1l vL SCLnA8l C

1.9
-0.2
-1.1
-0.7
-0.3
-2.1
-1.7
-0.3 -0.3 -0.3 -0.3
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
2009 2011 2013 2013 2017 2019
o
f

C
u

a. CPAnCL l n S18uC1u8AL 8uuCL1
uLll Cl 1

0
30
100
130
2008 2010 2012 2014 2016 2018

o
f

C
u

b. uL81 1C Cu 8A1l C

uebL Lo Cu 8aLlo
8ackward Looklng uebL Lo
Cu 8aLlo 8enchmark
0
2
4
6
8
10
12
14
2008 2010 2012 2014 2016 2018

o
f

C
u

c. AC1uAL Anu S18uC1u8AL uLll Cl 1

Ceneral CovernmenL ueflclL
SLrucLual ueflclL
-6
-4
-2
0
2
4
6
8
10
12
2008 2010 2012 2014 2016 2018

o
f

C
u

d. AC1uAL Anu S18uC1u8AL 8l MA8?
uLll Cl 1

Ceneral CovernmenL rlmary ueflclL
SLrucLual rlmary ueflclL
-9.8
-3.0
1.6
2.9
2.6
3.8
4.2 4.2
3.9
4.7
3.3
-10
-3
0
3
10
2009 2011 2013 2013 2017 2019

e. nCMl nAL C8CW1P 8A1L

10.3
4.1
6.0
3.8
3.3
3.1
2.0
-0.7
-1.2
-1.6
-2.0
-4
-2
0
2
4
6
8
10
12
2009 2011 2013 2013 2017 2019
t

b
l
l
l
l
o
n
s

f . 8LCul 8Lu ul SC8L1l CnA8? Au!uS1MLn1

86

ll Cu8L 4. 6: ASSuMLu AnnuAL Au! uS1MLn1 l n
S18uC1u8AL uLll Cl 1 = 0. 73 L8CLn1ACL Cl n1S, 2016 - 2019.
ALL C1PL8 ASSuM1l CnS A8L AS l n 5lu 201J l LLuS18A1l vL SCLnA8l C

1.87
-0.21
-1.06
-0.73
-0.47
-2.10
-1.70
-0.73 -0.73 -0.73 -0.73
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
2009 2011 2013 2013 2017 2019

o
f

C
u

a. CPAnCL l n S18uC1u8AL 8uuCL1
uLll Cl 1

0
30
100
130
2008 2010 2012 2014 2016 2018

o
f

C
u

b. uL81 1C Cu 8A1l C

uebL Lo Cu 8aLlo
8ackward Looklng uebL Lo
Cu 8aLlo 8enchmark
-2
0
2
4
6
8
10
12
14
2008 2010 2012 2014 2016 2018

o
f

C
u

C. AC1uAL Anu S18uC1u8AL uLll Cl 1

Ceneral CovernmenL
ueflclL
SLrucLual ueflclL
-6
-4
-2
0
2
4
6
8
10
12
2008 2010 2012 2014 2016 2018

o
f

C
u

d. AC1uAL Anu S18uC1u8AL 8l MA8?
uLll Cl 1

Ceneral CovernmenL
rlmary ueflclL
SLrucLual rlmary ueflclL
-9.8
-3.0
1.6
2.9
2.6
3.8
4.2 4.0
3.8
4.6
3.1
-10
-3
0
3
10
2009 2011 2013 2013 2017 2019

e. nCMl nAL C8CW1P 8A1L

10.3
4.1
6.0
3.8
3.3
3.1
2.0
-0.2
-0.7
-1.0
-1.3
-4
-2
0
2
4
6
8
10
12
2009 2011 2013 2013 2017 2019
t

b
l
l
l
l
o
n
s

f . 8LCul 8Lu ul SC8L1l CnA8?
Au!uS1MLn1


87

1A8LL 4. 1: lLASl 8LL 8l MA8? LxLnul 1u8L l nC8LASLS lC8 2016- 2019: S1A8l Ll 1?
8CC8AMML uuA1L 2013 l LLuS18A1l vL SCLnA8l C Anu AL1L8nA1l vL CL l C? SCLnA8l CS
Ieas|b|e r|mary Lxpend|ture
Growth, ercentage Changes
(Lxc|ud|ng cyc||ca|
unemp|oyment benef|t costs)
2016 2017 2018 2019
FGH =>?E XL22"+$#0$,8& F3&.0#,)Y <0+&2,.&
Nom|na| 1.1 1.3 -0.1 0.1
kea| -0.3 -0.2 -1.4 -1.2
09V G&#3&.$0*& G),.$ G&# C.."/ N&1"3$,). ,. F$#"3$"#02 <020.3&
Nom|na| 1.1 2.0 2.6 3.3
kea| -0.3 0.3 1.3 2.0
09ZV G&#3&.$0*& G),.$ G&# C.."/ N&1"3$,). ,. F$#"3$"#02 <020.3&
Nom|na| 0.3 1.1 1.7 2.3
kea| -1.1 -0.4 0.4 1.2
5ootce. 5lu 201J and llAC calculaLlons.
Note. CalculaLlons do noL reflecL posL-Su revlslons Lo pro[ecLed sLrucLural balances (see ChapLer 3). 1hese revlslons
suggesL LhaL, all else equal, a sLrucLural budgeL balance (lreland's Medlum-Lerm Cb[ecLlve) wlll be achleved earller
Lhan pro[ecLed ln 5lu 201J. 1hls could allow for larger feaslble percenLage expendlLure lncreases ln Lhe laLer years
of Lhe pro[ecLlon perlod Lhan ldenLlfled above.
4. 3 8L ? Cnu 1 PL 8Al L Cu1 : 8L uuCl nC 1 PL l8ACl L l 1 ? Cl l 8L L Anu' S
C8L ul 1 WC81 Pl nL S S
4. 3 . 1 l n1 8 CuuC 1 l Cn
As lreland's programme of offlclal fundlng asslsLance nears lLs end, and Lhe recenL success ln
lssulng bonds aL affordable ylelds lndlcaLes a reLurn Lo markeL access, aLLenLlon has Lurned Lo whaL
needs Lo be done Lo ensure LhaL Lhe reLurn Lo markeL access ls susLalned. 1he background Lo Lhls
pollcy dlscusslon lncludes Lhe revealed fraglllLy of credlLworLhlness for counLrles wlLh hlgh deflclLs
and debLs wlLhln Lhe LMu. 1he absence of a domesLlc cenLral bank capable of acLlng as lender of
lasL resorL Lo CovernmenL has been shown Lo leave a counLry's capaclLy Lo borrow from markeL
sources qulLe vulnerable (see, e.g., ueCrauwe, 2011). lreland's recenL reLurn Lo markeL access has
resulLed from a poslLlve lnLeracLlon beLween lLs demonsLraLlon of economlc and pollLlcal capaclLy
Lo ad[usL an unsusLalnable flscal sLance - lncludlng meeLlng Lhe condlLlons for offlclal fundlng
supporL - LogeLher wlLh lmprovemenLs ln sysLems for provldlng LhaL supporL. 1hese lmprovemenLs
lnclude Lhe esLabllshmenL of a permanenL Luro Area ballouL fund (Lhe Luropean SLablllLy
Mechanlsm (LSM)) and a weakenlng of demands for offlclal-credlLor senlorlLy. lndlcaLlons are LhaL
88

Lhe LC8's lnLroducLlon of lLs CuLrlghL MoneLary 1ransacLlons (CM1) programme has furLher
underplnned markeL confldence.
1hls secLlon brlefly revlews Lhe componenLs of a posslble sLraLegy Lo help ensure robusL markeL
access glven currenL offlclal supporL sysLems. (ollcles Lo sLrengLhen Lhese supporL sysLems - for
example, Lhe lnLroducLlon of some form of Lurobonds or a debL redempLlon fund - are noL
consldered, alLhough such pollcles could furLher reduce fraglllLy.) lL musL be recognlsed LhaL self-
proLecLlon sLraLegles lnvolve boLh beneflLs and cosLs. 1he maln beneflL ls Lhe reduced suscepLlblllLy
Lo fundlng crlses and a brlef dlscusslon of Lhe suscepLlblllLy Lo self-fulfllllng fundlng crlses ls flrsL
provlded. 1he naLure of Lhe cosLs wlll depend on Lhe self-proLecLlon approach pursued. 1hree
elemenLs of a posslble sLraLegy Lo supporL robusL markeL access are Lhen dlscussed.
4. 3 . 2 SL L l - luL l l L L l nC l unul nC C8 l S L S : 1 PL 8 C8 L L M Cl MuL 1 l L L LCul L l 8 8 l A
Much of Lhe recenL llLeraLure on Lhe fraglllLy of credlLworLhlness wlLhln Lhe Luro Area has focused
on Lhe posslblllLy of mulLlple expecLaLlons-based equlllbrla (see, e.g., ueCrauwe, 2011, and CorseLLl
and uedola (2013)). 1he classlc bad equlllbrlum" sLory focuses on Lhe effecLs of fears of defaulL on
lnLeresL raLes and consequenL debL dynamlcs. lears of defaulL lead Lo a large rlsk premlum on
CovernmenL borrowlng, Lhe resulLlng hlgh lnLeresL raLe Lhen worsens Lhe counLry's debL dynamlcs,
and valldaLes Lhe lnlLlal fears (see Calvo, 1988, for Lhe classlc mulLlple-equlllbrla model).
ln lreland's case, Lhe relaLlvely long average maLurlLy of ouLsLandlng debL should have provlded a
degree of proLecLlon agalnsL a sudden shlfL Lo a bad equlllbrlum ln 2010. Powever, anoLher channel
seems Lo have been aL work. lears LhaL Lhe counLry would enLer a ballouL programme, and LhaL
such a programme could come wlLh a forced resLrucLurlng of prlvaLely held debL (wlLh offlclal
lender senlorlLy), made lL dlfflculL Lo access new borrowlng, whlch lLself would be sub[ecL Lo losses
ln Lhe evenL of resLrucLurlng. AlLhough Lhere were real concerns abouL fundamenLal lnsolvency - ln
parL due Lo Lhe cosLs of Lhe banklng-sysLem ballouL - Lhe concerns abouL Lhe lmpllcaLlons of a
ballouL for resLrucLurlng may have made fears of a ballouL self-fulfllllng ln laLe 2010. lndeed, ln
lreland's case, concerns relaLlng Lo a forced resLrucLurlng appear Lo have grown over Lhe flrsL half
of 2011 even as Lhe average lnLeresL cosL remalned low due Lo access Lo offlclal fundlng. A slmllar
dynamlc may have been presenL for orLugal, wlLh Lhe counLry loslng markeL access ln 2011 and
also requlrlng a ballouL programme. lrom mld-2011 onwards, percepLlons of Lhe naLure of Lhe
evolvlng ballouL/ball-ln reglme began Lo change, wlLh Lhe llkellhood of a forced resLrucLurlng
recedlng for counLrles LhaL seemed capable of sLablllslng Lhelr debL dynamlcs. 1hls sLablllsaLlon has

89

been relnforced by Lhe announcemenL of Lhe CM1 programme by Lhe LC8. Cverall, Lhere has been
a dramaLlc fall ln lrlsh ylelds as programme condlLlons have been conslsLenLly meL.
4. 3 . 3 SL L l - 8 C1 L C 1 l Cn ACA l nS 1 lunu l nC C8 l S L S : LL L ML n1 S Cl A S1 8 A1 L C?
AlLhough Lhe evolvlng Luropean lender-of-lasL resorL reglme should be less suscepLlble Lo Lhe
mulLlple equlllbrla problem Lhan was Lhe case ln 2010/11, Lhe uncerLaln domesLlc and lnLernaLlonal
macroeconomlc envlronmenLs - and llngerlng doubLs abouL Lhe sLrengLh of Lhe Luro Area's lender
of lasL resorL funcLlon - are llkely Lo keep credlLworLhlness fraglle. 1hls ralses Lhe quesLlon of whaL
counLrles can do ln addlLlon Lo sLablllslng Lhelr publlc flnances Lo self-proLecL agalnsL a bad
equlllbrlum.
A slmllar quesLlon was wldely debaLed ln emerglng markeL economles followlng a serles of crlses
LhaL lncluded Mexlco (1994), LasL Asla (1997-98), 8ussla (1998), 8razll (1999) and ArgenLlna (2002).
A common feaLure of Lhese crlses was Lhe exlsLence of large amounLs of shorL-Lerm debL ln forelgn
currency relaLlve Lo forelgn-currency reserves. 1hls led Lo suscepLlblllLy Lo roll-over crlses, where
lnvesLors worrled abouL Lhe wllllngness of oLher lnvesLors Lo roll over loans, leadlng Lo a run" on
Lhe counLry and a sudden sLop" of caplLal lnflows. ln Lhe afLermaLh of Lhese crlses, many emerglng
markeL CovernmenLs adopLed self-proLecLlon sLraLegles Lo proLecL agalnsL such roll-over crlses
(leldsLeln 1999, Chang and velasco, 1999).
1hree posslble elemenLs of a self-proLecLlon sLraLegy agalnsL self-fulfllllng llquldlLy crlses ln a Luro
Area conLexL can be consldered.
127
ln assesslng Lhe approprlaLe mlx of elemenLs, lL ls lmporLanL Lo
recognlse LhaL each elemenL ls cosLly, and Lhe marglnal cosL of addlLlonal proLecLlon along each
dlmenslon ls llkely Lo rlse wlLh Lhe level of proLecLlon already secured. 1he opLlmal sLraLegy ls
Lherefore llkely Lo lnvolve a mlx of Lhe elemenLs.
( l ) L x 1 L nu A nu S MCC1 P 1 PL MA 1 u8 l 1 ? S 1 8 uC 1 u 8 L Cl Cu1 S 1 A nul nC uL 8 1
lL has long been recognlsed LhaL a shorL and/or bunched maLurlLy sLrucLure can lncrease Lhe rlsk of
a roll-over crlsls (see, e.g., Aleslna et ol. 1990, and Clavazzl and agano, 1990). 1he baslc ldea ls LhaL
Lhe probablllLy of falllng lnLo Lhe Lype of bad equlllbrlum dlscussed above lncreases when a large
amounL of debL has Lo be reflnanced ln a shorL perlod of Llme, poLenLlally qulckly ralslng Lhe
average lnLeresL raLe on ouLsLandlng debL. Powever, exLendlng Lhe maLurlLy sLrucLure can also be

127
AlLhough lreland borrows malnly ln Luro, lL shares wlLh Lhe crlsls-affecLed emerglng markeLs Lhe facL LhaL lL ls
borrowlng ln a currency lL does noL conLrol.
90

cosLly where Lhe CovernmenL faces a Lerm premlum on longer-maLurlLy debL (see llgure 4.7 for Lhe
lrlsh and Cerman yleld curve aL selecLed polnLs ln Llme.)
128
Cne elemenL of a sLraLegy Lo reduce
fraglllLy ls Lhen Lo exLend and smooLh ouL Lhe maLurlLy sLrucLure, and also Lo llmlL Lhe amounL of
debL LhaL ls maLurlng ln Lhe shorL Lo medlum run, durlng whlch Llme fundlng markeLs are llkely Lo
remaln volaLlle.
129
(See llgure 4.8 for Lhe maLurlLy sLrucLure of long-Lerm and offlclal debL followlng
Lhe !une 2013 exLenslon of LlSl loans). 1he marglnal beneflLs of Lhls self-proLecLlon sLraLegy
(reduced suscepLlblllLy Lo roll-over crlses) musL be welghed agalnsL Lhe marglnal cosLs (hlgher
overall fundlng cosLs), and also compared Lo oLher avallable opLlons for self proLecLlon.

128
ulfferenL explanaLlons have been glven for Lhe exlsLence of such a Lerm premlum and Lhe consequenL relaLlve
cosLllness of longer-Lerm debL. A Lerm premlum may slmply resulL from lnvesLor preferences. arLlcular lnvesLors may
have a preference - or preferred hablLaL" - for a glven parL of Lhe yleld curve. 1hls can lead Lo a segmenLed markeL
wlLh ylelds LhaL are senslLlve Lo relaLlve supplles aL dlfferenL maLurlLles. lncreaslng Lhe relaLlve supply of longer-maLurlLy
debL would Lhen sLeepen Lhe yleld curve. ln Lhe conLexL of bank fundlng, ulamond and 8a[an (2001) emphaslse Lhe
poslLlve lncenLlve effecLs of havlng a fraglle shorL-maLurlLy sLrucLure LhaL musL be rolled over frequenLly. !eanne (2009)
applles Lhls ldea of a shorL maLurlLy sLrucLure as a commlLmenL devlce Lo soverelgn debL. LffecLlvely, CovernmenLs on
such a shorL leash" have a sLronger lncenLlve Lo pursue flscal pollcles LhaL lowers lnvesLor rlsk. 1he Lerm premlum may
rlse as Lhe CovernmenL devlaLes furLher from Lhe opLlmal maLurlLy sLrucLure from an lncenLlve perspecLlve. AnoLher
lnLeresLlng explanaLlon for a Lerm premlum ls glven by Alfaro and kanczuk (2006). ln Lhe conLexL of a model wlLh
lmperfecL lnformaLlon on Lhe CovernmenL's Lype, Lhey noLe LhaL, condlLlonal on Lhe CovernmenL belng vlewed as a
low-defaulL Lype aL presenL, Lhe probablllLy of Lhe CovernmenL conLlnulng Lo be a low-defaulL Lype ls hlgher ln Lhe near
Lerm Lhan ln Lhe more dlsLanL fuLure. 1hls ls based on Lhe assumpLlon LhaL Lhe probablllLy of Lhe currenL CovernmenL
belng ln power ls hlgher ln Lhe shorL Lerm. 1hls would agaln lead Lo a Lerm premlum and a consequenL cosL advanLage
Lo shorL-Lerm debL.
129
lL should be noLed LhaL an upward sloplng yleld curve does noL necessarlly lmply Lhe exlsLence of a Lerm premlum. lf
lL ls expecLed LhaL shorL-Lerm raLes wlll rlse, Lhe yleld curve wlLh slope upwards even wlLhouL a Lerm premlum. 1he LC8
ls presenLly keeplng shorL-Lerm raLes very low ln Lhe conLexL of llquldlLy Lrap condlLlons. AlLhough lL has sLaLed lLs
expecLaLlon LhaL shorL-Lerm raLes wlll remaln low for some Llme under lLs new forward-guldance pollcy, shorL-Lerm
raLes should rlse as Luro Area economlc condlLlons evenLually normallse.

91

5ootce. n1MA and llAC CalculaLlons.

ll Cu8L 4. 8: LCnC- 1 L8M Anu Cll l Cl AL uL81 MA1 u8l 1?
130

130
noLe: Lhls flgure reflecLs LlSM loan orlglnal maLurlLy daLes. As wlLh LlSl loans, LlSM loans are also sub[ecL Lo a 7
year exLenslon. Whlle Lhe revlsed maLurlLy daLes of lndlvldual LlSM loans wlll only be deLermlned as Lhey approach
Lhelr orlglnal maLurlLy daLes, lL ls noL expecLed LhaL lreland wlll have Lo reflnance any of lLs LlSM loans before 2027.
-1
0
1
2
3
4
3
6
7
8
9
10
1M 3M 6M 9M 1? 2? 3? 4? 3? 6? 7? 8? 9? 10? 12? 13? 20? 23? 30?
?
l
e
l
d

8
a
L
e

-

M
l
d

C
o
n
v
e
n
L
l
o
n
a
l

(
)

ll Cu8L 4. 7: SCvL8Ll Cn ?l LLu Cu8vLS, l 8LLAnu Anu CL8MAn?,
SLLLC1Lu uA1LS ( Ml u- ?LA8)
lreland (01/07/13) lreland (02/07/12) lreland (01/07/11)
Cermany (01/07/13) Cermany (02/07/12) Cermany (01/07/11)
0
3
10
13
20
23
30
t

b
l
l
l
l
o
n
s

lrlsh CovernmenL 8onds Cfflclal (excl LlSM) LlSM
5ootce. n1MA, end-CcLober 2013.
92

( l l ) AC C uMu L A 1 L CA S P 8L S L 8 v L S
8odrlk (2006) documenLs Lhe large lncreases ln reserves held by emerglng markeL economles
followlng Lhe sequence of crlses of Lhe 1990s and early 2000s. Pe also revlews evldence on Lhe role
LhaL such reserve accumulaLlon can play ln crlsls mlLlgaLlon and prevenLlon.
ln preparaLlon for a reLurn Lo full markeL access, Lhe n1MA has already accumulaLed slgnlflcanL
cash reserves (see llgure 4.9). Compared Lo oLher Luropean economles, Lhese reserves are aL a
hlgh level as a share of LoLal flnanclng requlremenLs over Lhe perlod Lo 2013 (see llgure 4.10).
131

Cf course, such cash reserves come wlLh a cosL Lo Lhe exLenL LhaL Lhe marglnal lnLeresL raLe on new
borrowlng ls above Lhe reLurn on lnvesLmenLs ln Lhe cash-llke asseLs ln whlch Lhe reserves are held.
1he marglnal cosL of reserve accumulaLlon ls also llkely Lo rlse wlLh Lhe level of reserves Lo Lhe
exLenL LhaL Lhe lnLeresL spread on Lhe resulLlng hlgher debL and Lhe llquld asseLs worsens
underlylng debL dynamlcs.

131
lL should be noLed LhaL lreland has a slgnlflcanL amounL of maLurlng debL posL-2013. Accordlng Lo Lhe n1MA, t86
bllllon of long-Lerm and offlclal debL maLures beLween 2016 and 2020 (see fooLnoLe 130 regardlng LlSM maLurlLles).
0
3
10
13
20
23
30
33
40
1998C4 2000C4 2002C4 2004C4 2006C4 2008C4 2010C4 2012C4
t

b
l
l
l
l
o
n
s

ll Cu8L 4. 9: CCvL8nMLn1 CASP 8LSL8vLS:
Cu88LnC? Anu uLCSl 1S 1998C4 1C 2013C2
5ootce. LurosLaL, CuarLerly llnanclal AccounLs for Ceneral CovernmenL.

93

Powever, Lhe exlsLence of such balances also means LhaL Lhe CovernmenL should have more Llme
Lo demonsLraLe lLs fundamenLal solvency before havlng Lo enLer a programme LhaL could lnvolve
resLrucLurlng prlvaLely held debL. 1hls glves proLecLlon agalnsL sudden shlfLs ln markeL senLlmenL,
followlng, say, from conLaglon from a crlsls flare-up ln anoLher Luro Area counLry. 1he currenL plan
ls Lo accumulaLe large cash reserves Lo ease Lhe dlfflculL LranslLlon back Lo full markeL access.
Powever, Lhe ongolng fraglllLy of credlLworLhlness may mean LhaL slgnlflcanL reserve holdlngs
would be needed for a perlod of Llme, alLhough Lhe slze of Lhe opLlmal holdlngs wlll depend on Lhe
oLher elemenLs of Lhe self-proLecLlon sLraLegy and macroeconomlc developmenLs.
( l l l ) nL C C1 l A 1 L 8 L C A u1 l CnA 8 ? l u nu l nC L l nL S Wl 1 P Cl l l C l A L L L nuL 8 S
1he flnal poLenLlal elemenL ls access Lo a pre-arranged precauLlonary (condlLlonal) credlL llne. 1he
baslc ldea ls LhaL, provlded Lhe counLry ls pursulng approprlaLe pollcles, offlclal lenders agree ln
advance Lo meeL speclfled fundlng needs lf markeL access ls losL. As dlscussed above, an lmporLanL
feaLure for such a credlL llne Lo be successful ln avoldlng a bad equlllbrlum ls LhaL a counLry
meeLlng lLs condlLlons would noL be forced Lo resLrucLure exlsLlng prlvaLely held debL, or, aL leasL,
such resLrucLurlng would be sub[ecL Lo a hlgh Lrlgger.
1he exLenL Lo whlch Lhls self-proLecLlon sLraLegy can be used ls llkely Lo be llmlLed by Lhe slze of
avallable credlL llnes. 1he marglnal cosL of such proLecLlon may also rlse wlLh Lhe level of proLecLlon
Lo Lhe exLenL LhaL larger llnes come wlLh hlgher fees and/or more condlLlons. Agaln, glven a rlslng
0
10
20
30
40
30
60
70
80
90
l1 LS 1 C8 8L l8 nL uk CZ Sl uk lL Sk Au ll uL

o
f

C
u

ll Cu8L 4. 10: MA1u8l nC uL81 Anu Ll Cul u CCvL8nMLn1
ASSL1S
llnanclng needs for 2013-13 Llquld AsseLs
5ootce. lnLernal CalculaLlons based on LurosLaL and lMl daLa.
94

marglnal cosL, such advance provlslon for llquldlLy supporL ls llkely Lo be [usL one elemenL of an
opLlmal dlverslfled self-proLecLlon sLraLegy.
As regards poLenLlally avallable precauLlonary credlL llnes from offlclal lenders, Lhe LSM offers Lwo
precauLlonary faclllLles: Lhe Lnhanced CondlLlons CredlL Llne (LCCL) and (wlLh more sLrlngenL
quallfylng condlLlons) Lhe recauLlonary CondlLloned CredlL Llne (CCL).
132
ln addlLlon Lo lLs SLand-
8y ArrangemenL (S8A),
133
Lhe lMl also offers Lwo precauLlonary credlL llnes: Lhe recauLlonary and
LlquldlLy Llne (LL)
134
and (agaln wlLh more sLrlngenL quallfylng condlLlons) Lhe llexlble CredlL Llne
(lCL).
133

recauLlonary faclllLles would have come wlLh condlLlons and monlLorlng. Powever, Lhe condlLlons
would have been llkely Lo be broadly ln llne wlLh commlLmenLs already ln place under naLlonal and
Luropean flscal rules. 1he CovernmenL ls also plannlng Lo puL ln place a medlum-Lerm sLraLegy Lo
malnLaln reform momenLum afLer Lhe currenL programme ends. 1he elemenLs of Lhls sLraLegy
could have overlapped wlLh any addlLlonal condlLlonallLy. Moreover, posL-programme monlLorlng
by Lhe Lu ls seL Lo Lake place ln any case unLll 73 per cenL of Lhelr programme loans have been
repald, wlLh slmllar arrangemenLs ln effecL wlLh respecL Lo lMl loans.
136

Clven a fraglle lnLernaLlonal flnanclal envlronmenL, Lhe Councll would Lhus have supporLed an
appllcaLlon for a precauLlonary credlL llne as parL of a broader self-proLecLlon sLraLegy. rovlded lL
had come wlLh reasonable Lerms and condlLlons, such a faclllLy would have provlded valuable
addlLlonal proLecLlon agalnsL any renewed fundlng pressures as lreland exlLs Lhe Lu/lMl asslsLance
programme. 1he CovernmenL announced lLs declslon noL Lo seek such a faclllLy on november 14.

132
lor deLalls, see:
hLLp://www.esm.europa.eu/pdf/LSM20Culdellne20on20precauLlonary20flnanclal20asslsLance.pdf.
133
lor deLalls, see: hLLp://www.lmf.org/exLernal/np/exr/facLs/sba.hLm.
134
lor deLalls, see: hLLp://www.lmf.org/exLernal/np/exr/facLs/pll.hLm.
133
lor deLalls, see: hLLp://www.lmf.org/exLernal/np/exr/facLs/fcl.hLm.
136
Confldence ln lreland's capaclLy Lo achleve susLalned bond markeL access could furLher be relnforced Lhrough LC8
commlLmenLs Lo supporL secondary markeL bond ylelds Lhrough lLs CuLrlghL MoneLary 1ransacLlons (CM1) programme.
A precauLlonary programme from Lhe Luropean SLablllLy Mechanlsm (LSM) ls one of Lhe requlremenLs for access Lo Lhe
CM1 programme.
Aooex A. llscol cooocll 8eocbmotk ltojectloos 24 5eptembet

93

AnnLx A: llSCAL CCunClL 8LnCPMA8k 8C!LC1lCnS 24 SL1LM8L8
As parL of Lhe endorsemenL process, Lhe Councll's SecreLarlaL produced a seL of benchmark
pro[ecLlons ln advance of lLs meeLlngs wlLh Lhe ueparLmenL of llnance. 1he benchmark pro[ecLlons
were flnallsed on 24 SepLember 2013 and are summarlsed ln Annex 1able A.1.
AnnLx 1A8LL A. 1: 8LnCPMA8k 8C! LC1l CnS lC8 2013 Anu 2014
change un|ess otherw|se stated 2013 2014
kea| GD 0.0 2.2
Consumpt|on -0.4 0.4
Investment 6.4 3.4
Government -2.0 -2.0
Stock change ( of GD) 0.1 0.0
Lxports 0.6 4.3
Imports 0.9 3.4
Current Account
( GD)
3.1 3.3
Lmp|oyment 1.9 1.3
Unemp|oyment kate () 13.8 13.3
nIC 0.8 1.1
GD Def|ator 0.9 1.4
Nom|na| GD
( b||||ons)
163.4 171.4
Nom|na| GD 0.9 3.6
Note. 8enchmark pro[ecLlons were flnallsed on 24 SepLember 2013.
1he Councll's endorseable range ls lnformed by, buL noL mechanlcally llnked Lo, Lhe uncerLalnLy
capLured ln fan charL analysls. lor conLexL, Annex llgure A.1 shows Lhe benchmark pro[ecLlons wlLh
Lhe sLandard fan charL consLrucLed around lL.

96

AnnLx ll Cu8L A. 1: 8LAL Cu lAn CPA81 8ASLu Cn 8LnCPMA8k 8C! LC1l CnS
137

137
lan charL range based on hlsLorlc forecasL errors over Lhe perlod 1990-2012. lor more dlscusslon on fan charLs, see
llAC, 2012b, Annex A lan CharLs Lo 8epresenL lorecasL uncerLalnLy", avallable aL: hLLp://www.flscalcouncll.le/wp-
conLenL/uploads/2012/09/AnnexA4.pdf
-4
-2
0
2
4
6
8
2010 2011 2012 2013 2014

Aooex 8. Moctoecooomlc lotecosts oJotseJ by tbe cooocll

97

AnnLx 8: MAC8CLCCnCMlC lC8LCAS1S LnuC8SLu 8? 1PL CCunClL
AnnLx 1A8LL 8. 1: uLA81MLn1 Cl ll nAnCL 8uuC1 2014 8Cvl Sl CnAL ll nAL lC8LCAS1S
change un|ess otherw|se stated 2013 2014
kea| GD 0.2 1.8
Consumpt|on -0.2 1.1
Investment 4.9 6.8
Government -0.9 -1.9
Stock change ( of GD) 0.4 0.3
Lxports -0.6 1.9
Imports -0.4 1.4
Current Account
( GD)
4.4 4.1
Lmp|oyment 1.6 1.4
nIC 0.7 1.3
GD Def|ator 0.9 0.9
Nom|na| GD
( b||||ons)
163.9 170.4
Nom|na| GD 1.2 2.7


98

AnnLx C: MAC8CLCCnCMlC lC8LCAS1 1A8LLS
AnnLx 1A8LL C. 1: uLA81MLn1 Cl ll nAnCL MAC8CLCCnCMl C lC8LCAS1S lC8 2012 vL8SuS
1PL Cu11u8n lC8 2012
change un|ess otherw|se
stated
<"1*&$
=>?E
FGH =>?E
<"1*&$
=>?@
Cutturn
Dec 2012 Apr 2013 Cct 2013 CSC
kea| GD 0.9 0.9 0.2 0.2
kea| GN 1.4 3.4 1.8 1.8
Consumpt|on -2.0 -0.9 -0.3 -0.3
Investment -3.8 1.2 -1.0 -1.0
Government -4.0 -3.7 -3.7 -3.7
Lxports 3.0 2.9 1.6 1.6
Imports 0.0 0.3 0.0 0.0
Current Account
( GD)
3.4 4.9 4.4 4.4
Lmp|oyment -0.7 -0.6 -0.7 -0.6
Unemp|oyment kate () 14.9 14.7 14.7 14.7
nIC 2.1 2.0 2.0 2.0
GD Def|ator 1.7 2.0 0.6 0.6
Nom|na| GD
( b||||ons)
163.2 163.6 163.9 163.9
Nom|na| GD 2.6 2.9 0.8 0.8
Nom|na| GN
( b||||ons)
130.9 nA 132.7 132.6
Nom|na| GN 3.0 nA 1.3 1.3

Aooex c. Moctoecooomlc lotecost 1obles

99

AnnLx 1A8LL C. 2: uL1Al L Lu MAC8CLCCnCMl C lC8LCAS1S lC8 2013
change un|ess
otherw|se stated
<"1*&$
=>?@
LSkI C8I IMI LC CLCD
Cct
2013
Cct
2013
Cct
2013
Cct
2013
Nov
2013
Nov
2013
kea| GD 0.2 0.3 0.3 0.6 0.3 0.1
kea| GN 1.0 2.0 0.1 0.3 nA nA
Consumpt|on -0.2 0.2 -0.4 -0.3 -0.6 -1.1
Investment 4.9 0.7 1.6 2.0 2.9 -7.8
Government -0.9 -0.7 -1.3 -0.6 -1.0 -0.9
Lxports -0.6 0.0 0.8 1.1 0.3 0.1
Imports -0.4 -0.1 0.4 0.6 0.2 -0.3
Current Account
( GD)
4.4 3.6 4.3 2.3 4.1 4.3
Lmp|oyment 1.6 1.9 1.1 0.6 1.2 1.4
Unemp|oyment kate
()
13.3 13.6 13.6 13.7 13.3 13.6
nIC 0.7 0.9 0.6 1.0 0.8 0.6
GD Def|ator 0.9 1.3 1.2 1.0 0.7 nA
Nom|na| GD
( b||||ons)
163.9 166.9 166.7 166.6 163.6 nA
Nom|na| GD 1.2 1.8 1.7 1.6 1.0 nA

100

change un|ess
otherw|se stated
<"1*&$
=>?@
LSkI C8I IMI LC CLCD
Cct
2013
Cct
2013
Cct
2013
Cct
2013
Nov
2013
Nov
2013
kea| GD 2.0 2.6 2.0 1.8 1.7 1.9
kea| GN 1.7 2.7 1.2 1.3 nA nA
Consumpt|on 1.8 1.3 0.4 0.3 0.3 0.8
Investment 6.8 4.2 6.6 4.0 4.4 3.9
Government -1.9 -1.3 -2.8 -2.8 -2.8 -1.9
Lxports 1.9 4.6 4.0 2.9 2.3 3.7
Imports 1.3 4.0 3.1 1.9 1.4 2.3
Current Account
( GD)
4.0 6.7 3.0 3.0 4.6 3.9
Lmp|oyment 1.3 1.3 1.2 0.9 1.3 0.3
Unemp|oyment kate
()
12.4 13.1 13.0 13.3 12.3 13.2
nIC 1.2 1.6 0.7 1.2 0.9 0.8
GD Def|ator 0.8 1.2 1.2 1.2 0.8 nA
Nom|na| GD
( b||||ons)
170.6 173.4 172.2 171.6 169.7 nA
Nom|na| GD 2.9 3.9 3.3 3.0 2.3 nA

Aooex c. Moctoecooomlc lotecost 1obles

101

change un|ess
otherw|se stated
<"1*&$ =>?@ IMI LC CLCD
Cct 2013 Cct 2013 Nov 2013 Nov 2013
kea| GD 2.3 2.3 2.3 2.2
kea| GN 1.7 2.0 nA nA
Consumpt|on 1.2 1.0 1.0 0.7
Investment 3.9 3.0 3.4 3.9
Government -1.3 -2.3 -2.3 -1.3
Lxports 2.7 4.0 3.7 3.9
Imports 2.1 3.0 2.7 3.4
Current Account
( GD)
3.8 3.1 4.9 3.4
Lmp|oyment 1.3 1.7 1.3 1.4
Unemp|oyment kate
()
11.8 12.8 11.7 12.3
nIC 2.0 1.4 1.2 1.0
GD Def|ator 1.4 1.4 1.1 nA
Nom|na| GD
( b||||ons)
177.0 178.4 173.9 nA
Nom|na| GD 3.7 4.0 3.6 nA

102

change un|ess otherw|se
stated
<"1*&$ =>?@ IMI
Cct 2013 Cct 2013
kea| GD 2.8 2.3
kea| GN 2.1 2.1
Consumpt|on 1.1 1.3
Investment 3.1 6.0
Government 0.2 0.3
Lxports 4.2 4.1
Imports 3.3 3.9
Current Account
( GD)
3.7 3.3
Lmp|oyment 1.3 1.7
nIC 2.0 1.6
GD Def|ator 1.3 1.6
Nom|na| GD
( b||||ons)
184.7 183.8
Nom|na| GD 4.4 4.1

Aooex u. uepottmeot of lloooce 8oJqetoty lotecosts lo 2012

103

AnnLx u: uLA81MLn1 Cl llnAnCL 8uuCL1A8? lC8LCAS1S ln 2012
ln CcLober 2013, Lhe CSC publlshed updaLed annual flgures for Lhe CovernmenL flnances up Lo
2012. 1he Ceneral CovernmenL deflclL ln 2012 was revlsed up Lo t13.3 bllllon (from t12.3 bllllon)
malnly on accounL of a change ln Lhe recordlng of sales of moblle Lelephone llcences.
138

ln 1able u.1, Lhe revlsed Ceneral CovernmenL daLa are shown relaLlve Lo recenL ueparLmenL of
llnance forecasLs. 1he budgeL deflclL was revlsed slgnlflcanLly beLween 8oJqet 201J and 5lu 201J
malnly on accounL of upward revlslons Lo Lhe maln revenue headlngs. 1he Councll ln lLs prevlous
llscol Assessmeot kepott had slgnalled Lhe facL LhaL CovernmenL revenues ln 2012 had been
conslsLenLly underesLlmaLed by Lhe ueparLmenL (llAC, 2013a).
Ceneral CovernmenL expendlLure ln 2012 was relaLlvely close Lo ueparLmenL of llnance forecasLs.
Powever, Lhls masked dlvergences wlLhln caLegorles wlLh lnLeresL and lnvesLmenL expendlLures
overesLlmaLed wlLh soclal paymenLs underesLlmaLed.
Cver Lhe course of 2012, Lhe forecasL for Lhe level of Lhe Ceneral CovernmenL debL was revlsed
upwards by [usL under t6 bllllon reflecLlng borrowlng by Lhe n1MA ln Lhe bond markeLs and
subsequenL accumulaLlon of llquld asseLs. Peadllne deflclL and debL raLlos were helped by an
upward revlslon Lo nomlnal Cu.

138
lnlLlally (ln Aprll 2013), Lhe CSC had recorded sales of moblle phone llcences ln 2012. lollowlng clarlflcaLlon from
LurosLaL, sales of t723 mllllon were moved from 2012 lnLo 2013. See c5O 201J, Covetomeot lloooce 5totlstlcs,
CcLober.
104

AnnLx 1A8LL u. 1: uLA81MLn1 Cl ll nAnCL CLnL8AL CCvL8nMLn1 8C! LC1l CnS
lC8 2012

8||||ons
FGH =>?=
<"1*&$
=>?E
FGH =>?E
;FJ
J"$$"#.
Apr 2012 Dec 2012 Apr 2013 Cct 2013
Genera| Government Def|c|t 13.1 13.3 12.S 13.S
Genera| Government Def|c|t,
of GD
139

8.3 8.2 7.6 8.2
kevenue 36.9 33.7 36.6 36.3
:0I&+ 38.9 39.3 39.7 39.3
F)3,02 ;).$#,-"$,).+ 9.9 9.3 9.3 9.7
J$%&# 8.1 7.1 7.4 7.3
Lxpend|ture 70.1 69.1 69.1 69.8
K)8&#./&.$ F&#8,3&+ 26.3 27.6 27.3 27.2
F)3,02 G06/&.$+ 27.3 27.0 28.7 29.0
L.$&#&+$ 6.3 6.3 6.1 3.9
L.8&+$/&.$ 4.0 3.6 3.3 3.1
J$%&# 3.6 4.3 3.6 4.7
Genera| Government Debt 186.7 191.9 192.3 192.3
Genera| Government Debt, of
GD
117.3 117.6 117.6 117.4
Nom|na| GD 138.9 163.2 163.6 163.9
5ootces. 5lu 2012, 8oJqet 201J, 5lu 201J and CSC.

139
1he Lxcesslve ueflclL rocedure (Lu) Ceneral CovernmenL deflclL celllng for lreland ln 2012 was 8.6 per cenL of
Cu.
Aooex . xcbepoet uoto lo 201J

103

AnnLx L: LxCPLCuL8 uA1A ln 2013
AnnLx ll Cu8L L. 1: MCn1PL? 1Ax 8LvLnuL 8Cll LL l n 2013:
LxLC1Lu vS AC1uAL

AnnLx ll Cu8L L. 2: LxCPLCuL8 nCn- 1Ax 8LvLnuL

0.0
1.0
2.0
3.0
4.0
3.0
6.0
7.0
!an leb Mar Apr May !un !ul Aug SepL CcL nov uec
t

b
l
l
l
l
o
n
s

AcLual LxpecLed
0
300
1,000
1,300
2,000
2,300
3,000
!an leb Mar Apr May !un !ul Aug SepL CcL nov uec
t

m
l
l
l
l
o
n
s

AcLual LxpecLed

106

AnnLx l: uLA81MLn1 Cl llnAnCL 8uuCL1A8? Cu1LCCk 1C 2016
AnnLx 1A8LL l. 1: uLA81MLn1 Cl ll nAnCL CLnL8AL CCvL8nMLn1 8C! LC1l CnS lC8 2014
8||||ons
<"1*&$ =>?E FGH =>?E <"1*&$ =>?@
Dec 2012 Apr 2013 Cct 2013
Genera| Government Def|c|t 8.9 7.S 8.2
Genera| Government Def|c|t, of GD -S.1 -4.3 -4.8
Structura| Def|c|t, of GD S.9 4.6 3.6
r|mary Def|c|t, of GD -0.6 -0.S 0.0
kevenue 60.3 61.4 60.9
1ax 44.0 44.8 43.8
L.1,#&3$ :0I&+ 19.3 19.9 19.2
R,#&3$ :0I&+ 23.9 24.1 23.6
;0(,$02 :0I&+ 0.8 0.8 1.0
Soc|a| Contr|but|ons 10.1 10.1 10.3
Cther 6.3 6.3 6.8
Lxpend|ture 69.4 69.1 69.1
Government Serv|ces 26.3 26.2 26.6
;)/(&.+0$,). )4 D/(2)6&&+ 18.2 17.8 18.4
L.$&#/&1,0$& ;).+"/($,). 8.3 8.4 8.1
Soc|a| 1ransfers 23.7 27.8 27.9
Interest 9.7 8.3 8.2
Subs|d|es 0.3 0.4 1.3
Cap|ta| 1ransfers

1.1
Investment 2.6 3.1 2.6
Cther 4.4 3.1 1.4
Genera| Government Debt, of GD 120.2 119.S 120.0
Nom|na| GD 174.1 174.3 170.6

Aooex l. uepottmeot of lloooce 8oJqetoty Ootlook 1o 2016

107

AnnLx 1A8LL l. 2: uLA81MLn1 Cl ll nAnCL CLnL8AL CCvL8nMLn1 8C! LC1l CnS lC8 2013
8||||ons
<"1*&$ =>?E FGH =>?E <"1*&$ =>?@
Dec 2012 Apr 2013 Cct 2013
Genera| Government Def|c|t -S.4 -4.0 -S.3
Genera| Government Def|c|t, of GD -3.0 -2.2 -3.0
kevenue 63.1 64.0 63.3
1ax 46.6 47.1 46.0
L.1,#&3$ :0I&+ 19.9 20.8 20.3
R,#&3$ :0I&+ 23.8 23.9 23.2
;0(,$02 :0I&+ 0.9 0.4 0.3
Soc|a| Contr|but|ons 10.3 10.2 10.6
Cther 6.2 6.7 6.8
Lxpend|ture 68.4 68.0 68.7
Government Serv|ces 23.7 23.1 26.4
;)/(&.+0$,). )4 D/(2)6&&+ 17.8 16.8 18.1
L.$&#/&1,0$& ;).+"/($,). 7.8 8.3 8.4
Soc|a| 1ransfers 23.3 27.3 26.6
Interest 10.0 8.9 8.8
Subs|d|es 0.4 0.4 1.3
Cap|ta| 1ransfers 1.1
Investment 2.6 3.1 2.6
Cther 4.3 3.0 1.9
Genera| Government Debt, of GD 116.8 11S.S 118.S
Nom|na| GD 181.4 181.6 177.0

108

AnnLx 1A8LL l. 3: uLA81MLn1 Cl ll nAnCL CLnL8AL CCvL8nMLn1 8C! LC1l CnS lC8
2016

8||||ons
FGH =>?E <"1*&$ =>?@
Apr 2013 Cct 2013
Genera| Government Def|c|t -3.2 -4.4
Genera| Government Def|c|t, of GD -1.7 -2.4
kevenue 6S.8 6S.2
1ax 48.7 47.8
L.1,#&3$ :0I&+ 21.2 20.9
R,#&3$ :0I&+ 27.0 26.4
;0(,$02 :0I&+ 0.4 0.4
Soc|a| Contr|but|ons 10.4 10.8
Cther 6.7 6.6
Lxpend|ture 69.0 69.6
Government Serv|ces 23.3 26.6
;)/(&.+0$,). )4 D/(2)6&&+ 16.9 18.1
L.$&#/&1,0$& ;).+"/($,). 8.6 8.6
Soc|a| 1ransfers 27.6 26.8
Interest 9.2 9.2
Subs|d|es 0.4 1.3
Cap|ta| 1ransfers 1.1
Investment 3.3 2.6
Cther 3.1 2.0
r|mary Lxpend|ture 39.8 60.4
Genera| Government Debt 209.S 211.6
Genera| Government Debt, of GD 110.8 114.6
Nom|na| GD 189.1 184.7
Nom|na| GD Growth, 4.2 4.4
Average Interest kate 4.4 4.4

Aooex C. llscol 1toospoteocy

109

AnnLx C: llSCAL 18AnSA8LnC?
1he degree of flscal Lransparency ln lreland ls of cenLral lmporLance Lo llAC's sLaLuLory roles of
assesslng offlclal forecasLs and Lhe approprlaLeness of Lhe flscal sLance. 1hls annex provldes deLalls
on lmporLanL recenL developmenLs ln Lhls regard: Lhe flrsL secLlon summarlses Lhe maln flndlngs
from a plloL flscal Lransparency assessmenL carrled ouL by Lhe lMl as parL of Lhe revlslon of lLs
llscal 1ransparency Code whlle Lhe second secLlon documenLs recenL key lmprovemenLs ln
lreland's flscal reporLlng LhaL address some of Lhe concerns ralsed ln Lhe lMl reporL.
1 PL l Ml' S ll S C AL 18 AnS A8 L nC ? AS S L S S ML n1 l C8 l 8 L L Anu
ln !uly 2013, Lhe lMl publlshed Lhe ouLcome of a plloL llscol 1toospoteocy Assessmeot fot ltelooJ.
1he ob[ecLlve of Lhe assessmenL was Lo ...evaluaLe lreland's flscal reporLlng, forecasLlng and
budgeLlng, and flscal rlsks analysls and managemenL pracLlces agalnsL Lhe sLandards seL by Lhe
lMl's newly revlsed llscal 1ransparency Code." lollowlng subsLanLlal lmprovemenLs ln recenL
decades, lreland scores well on flscal reporLlng and forecasLlng buL ls weaker ln Lerms of flscal rlsk
dlsclosure. key flndlngs of Lhe reporL are summarlsed below along wlLh some of lLs
recommendaLlons.
II SCAL kLCk1I NG
! llscal reporLlng ln lreland ls relaLlvely frequenL, rellable and comprehenslve, lndependenLly
produced and sub[ecL Lo exLernal audlL.
! AlLhough Lhere ls a hlgh degree of dlsclosure, lreland's flscal reporLlng suffers from
fragmenLaLlon. lssues lnclude dlfferences beLween ln-year and annual flscal reporLs ln Lerms
of lnsLlLuLlonal coverage, accounLlng basls (cash versus accrual) and classlflcaLlon sLandards
(only annual reporLs are LSA-93 based).
! Coverage of lnsLlLuLlons and publlc secLor asseLs and llablllLles ls found overall Lo be good,
alLhough publlc corporaLlons are noL lncluded ln Lhe llnance AccounLs and flscal sLaLlsLlcs and
flscal reporLs lnclude relaLlvely llLLle consolldaLed balance sheeL lnformaLlon.
! key recommendaLlons focus on expandlng Lhe coverage of flscal reporLs, boLh ln Lerms of Lhe
lnsLlLuLlons lncluded and Lhe asseLs and llablllLles recognlsed, and lncreaslng Lhe use of accrual
accounLlng and modern classlflcaLlon sLandards.

110

II SCAL ICkLCAS1I NG AND 8UDGL1I NG
! llscal forecasLlng and budgeLlng pracLlces are found Lo elLher be good or advanced ln mosL
areas. 8udgeL documenLaLlon seLs ouL clearly Lhe lmpacL of new pollcles and conLalns deLalled
dlsLrlbuLlonal analysls.
! 1here ls a lack of comprehenslveness ln Lhe annual budgeL documenLaLlon LhaL focuses on
Lxchequer cash revenues and expendlLures, however, resulLlng ln acLlvlLles of enLlLles such as
Lhe naLlonal enslon 8eserve lund (n8l) noL belng lncluded ln Lhe budgeL esLlmaLes lald
before arllamenL.
! Whlle Lhe budgeL documenLaLlon provldes a reconclllaLlon beLween Lhe Lxchequer 8alance
and Lhe Ceneral CovernmenL 8alance, no such lnformaLlon ls provlded on Lhe relaLlonshlp
beLween Lxchequer and Ceneral CovernmenL revenue and expendlLure aggregaLes. 1hls ls
parLlcularly relevanL ln Lerms of compllance wlLh Lhe medlum-Lerm expendlLure rule
lnLroduced ln Lhe llscol kespooslblllty Acts 2012 and 2013.
! 1he macroeconomlc forecasLs behlnd Lhe flscal forecasLs are presenLed clearly ln Lhe 8udgeL
documenLaLlon, and whlle macro forecasL errors have Lended Lo be large, Lhey are relaLlvely
unblased.
! LxpendlLure dlsclpllne appears Lo have beneflLed from Lhe lnLroducLlon of a medlum-Lerm
expendlLure framework followlng Lhe crlsls.
! Whlle Lhere ls some reconclllaLlon on Lhe expendlLure slde beLween Lhe flscal forecasLs
provlded aL dlfferenL polnLs ln Llme, no such breakdown ls provlded on Lhe revenue slde or for
Lhe overall balance.
! Comprehenslve long-Lerm flscal pro[ecLlons are noL publlshed and analysls of long-Lerm flscal
sLablllLy ls lacklng. 1hls ls parLlcularly worrylng glven lreland's demographlc proflle and
relaLlvely hlgh CovernmenL debL levels.
! key recommendaLlons hlghllghL Lhe need for regularly publlshed long-Lerm flscal pro[ecLlons
and deLalled reconclllaLlon of changes Lo flscal forecasLs.


111

II SCAL kI Sk ANALSI S AND MANAGLMLN1
! llscal rlsk analysls and managemenL meeLs only Lhe baslc sLandards of Lhe llscal 1ransparency
Code for mosL prlnclples.
! 1he lmporLance of flscal rlsk analysls and managemenL ln lreland ls underscored by relaLlvely
large flscal rlsks and lack of room Lo accommodaLe shocks glven Lhe hlgh level of CovernmenL
debL.
! 1he value of Lhe lnformaLlon publlshed on flscal rlsks ls dlluLed by Lhe facL LhaL lL ls fragmenLed
- publlshed ln many separaLe documenLs across many agencles. Moreover, much of Lhe
lnformaLlon ls reporLed by agencles oLher Lhan Lhe ueparLmenLs responslble for flscal
managemenL (ueparLmenL of llnance and Lhe ueparLmenL of ubllc LxpendlLure and 8eform).
! Analysls of macroeconomlc rlsks ls reporLed Lo meeL advanced pracLlce when Lhe analysls
publlshed ln reporLs by ueparLmenL of llnance and llAC ls consldered [olnLly. 1he analysls of
speclflc rlsks, such as Lhose relaLlng Lo conLlngenL llablllLles, Lhe values of Lhe CovernmenL's
asseLs and llablllLles and parLlcular facLors such as Lhe lmpacL of Lhe paLenL cllff" on Lax
revenues, meeLs only Lhe baslc sLandard.
! Small amounLs for conLlngencles are lncluded ln lreland's 8udgeL buL Lhere are no publlshed
crlLerla for Lhelr use.
! 1he n1MA publlshes lnformaLlon on Lhe rlsks assoclaLed wlLh CovernmenL llablllLles, a
sLraLegy for managlng Lhe flnanclal asseLs of Lhe n8l and Lhe currency composlLlon and
maLurlLy proflle of Lhe naLlonal debL. Powever, Lhere ls no reporL LhaL publlshes consolldaLed
lnformaLlon on Lhe asseLs and llablllLles managed by Lhe n1MA, rlsk analysls of LhaL porLfollo
and a sLraLegy for Lhelr managemenL.
! 1he maln recommendaLlons relaLlng Lo flscal rlsk analysls and managemenL are Lhe
publlcaLlon of an annual comprehenslve sLaLemenL on flscal rlsks as parL of budgeL
documenLaLlon and an annual reporL on Lhe CovernmenL's sLraLegy for managlng lLs porLfollo
of asseLs and llablllLles.
1he reporL concludes LhaL lreland ls ...approachlng lnLernaLlonal besL pracLlce ln flscal reporLlng
and meeLs Lhe baslc requlremenLs for flscal rlsk dlsclosure under Lhe lMl's llscal 1ransparency
Code". 1he CovernmenL's amblLlous plans Lo make furLher lmprovemenLs are acknowledged and lL
ls noLed LhaL, glven Lhe exlsLlng hlgh degree of flscal dlsclosure, much progress can be made aL
112

relaLlvely low cosL by consolldaLlng and publlshlng exlsLlng lnformaLlon lnLo a comprehenslve seL of
publlc secLor flnanclal sLaLemenLs.
I MkCVLMLN1S I N II SCAL kLCk1I NG I N 2013
ln parallel wlLh Lhe preparaLlon of Lhe lMl reporL, a number of lmporLanL developmenLs ln flscal
reporLlng have Laken place ln lreland over Lhe pasL Lwelve monLhs. 1hese developmenLs go some
way ln addresslng concerns ralsed by Lhe lMl reporL as well as ln prevlous llscol Assessmeot
kepotts by Lhe Councll.
1radlLlonally, Lhe monLhly Lxchequer sLaLemenL publlshed by Lhe ueparLmenL of llnance was Lhe
maln source of regular lnformaLlon on Lhe publlc flnances. 1hls daLa relaLes Lo recelpLs and
expendlLures of cenLral CovernmenL, wlLh daLa recorded on a cash (as opposed Lo accruals) basls.
1he Lxchequer sLaLemenLs showed neL spendlng by CovernmenL ueparLmenLs (gross spendlng less
approprlaLlons-ln-ald (A-ln-As)).
ln CcLober 2012, Lhe ueparLmenLs of llnance and ubllc LxpendlLure and 8eform began publlshlng
Lhe AnalyLlcal Lxchequer SLaLemenL (ALS) ln con[uncLlon wlLh Lhe normal monLhly release. 1he ALS
shows expendlLure (and revenue) on a gross basls as well as expendlLure by Lhe Soclal lnsurance
lund (Sll) and naLlonal 1ralnlng lund (n1l). lL also shows Lhe monLhly ouLLurn for A-ln-As.
1he ALS groups (currenL and caplLal) revenue and expendlLure lLems, ln deLermlnlng Lhe monLhly
Lxchequer balance. llnally, Lhe ALS presenLs a more deLalled breakdown of non-Lax revenue lLems
(acLual and expecLed revenues). 1he Councll had prevlously called for more lnformaLlon Lo be
provlded on Lhe sources of non-Lax revenues (llAC, 2012b). 1he maln advanLage of Lhe ALS ls LhaL
lL provldes a clearer plcLure of Lhe gross Lxchequer spendlng and revenues.
lrom 2014, under Lhe requlremenLs of Lhe Lu Slx ack", Lhe ueparLmenL of llnance plans Lo
publlsh monLhly cash based Ceneral CovernmenL daLa.
ln Aprll 2013, Lhe CSC publlshed Lwo new sLaLlsLlcal releases relaLlng Lo annual and quarLerly
CovernmenL llnance SLaLlsLlcs. 1hese show Lhe maln componenLs of Lhe Ceneral CovernmenL
deflclL and debL from 1990 Lo 2012 (annual) and from 1999 Lo 2012 (quarLerly). 1hey also
presenLed for Lhe flrsL Llme Lhe offlclal calculaLlon of boLh neL Ceneral CovernmenL debL and Lhe
LoLal neL worLh of CovernmenL. As a resulL, deLalled lnformaLlon on CovernmenL flnanclal asseLs,

113

llablllLles as well as non-flnanclal asseLs was provlded. 1hls lncluded daLa on Lhe value of publlc-
prlvaLe-parLnershlp conLracLs and CovernmenL guaranLees. (lor deLalls see 8arnes and SmyLh
2013).
1he quarLerly release makes lL easler Lo monlLor developmenLs ln Lhe key Ceneral CovernmenL
aggregaLes LhroughouL Lhe course of Lhe year. rlor Lo Lhese publlcaLlons, Lhere were [usL Lwo
offlclal releases (Lu MaasLrlchL reLurns ln CcLober and Aprll).


114

AnnLx P: 1PL MLuluM-1L8M LxLnul1u8L l8AMLWC8k
1he lnLroducLlon of a Medlum-1erm LxpendlLure lramework (M1Ll) (see also 8ox l) for
ueparLmenLal expendlLure goes some way Lo addresslng prevlous weaknesses ln Lhe mulLl-annual
budgeLary plannlng process ln lreland.
140
1he M1Ll has been furLher sLrengLhened Lhls year wlLh:
(l) 1he enacLmenL of Lhe MlnlsLers and SecreLarles (AmendmenL) AcL 2013. 1hls AcL seLs ouL
Lhe coverage of Lhe Lhree year aggregaLe celllngs and provldes LhaL boLh Lhe aggregaLe
celllng and MlnlsLerlal celllngs musL be seL and revlsed by CovernmenL declslon, and
(ll) 1he publlcaLlon of a more deLalled admlnlsLraLlve Clrcular on Lhe rules and procedures
applylng Lo Lhe celllngs. 1he admlnlsLraLlve Clrcular provldes for Lhe clrcumsLances ln
whlch boLh Lhe aggregaLe and MlnlsLerlal Lhree-year celllngs may be revlsed (escape
clauses") and for a reconclllaLlon wlLh prevlous celllngs where Lhls occurs, Lhe carryover of
savlngs beLween years, Lhe sancLlon mechanlsms applylng where ueparLmenLs exceed
celllngs, and for perlodlc comprehenslve revlews of expendlLure. 1he Clrcular also llnks Lhe
seLLlng of celllngs wlLh Lhe expendlLure benchmark requlremenLs aL a Luropean level. 1he
expendlLure benchmark ls dlscussed ln 8ox l.
141

1hese arrangemenLs also expllclLly llnk Lhe seLLlng of celllngs Lo Lhe overall Lu flscal sLrucLures. As
parL of Lhe wlder Lu flscal reforms, Lhe so-called Slx ack" lnLroduced a complemenLary measure
Lo Lhe core 8udgeLary 8ule measure known as Lhe expendlLure benchmark (L8). 1he role of Lhe L8
wlLhln Lhe wlder reforms of Lhe SLablllLy and CrowLh acL ls dlscussed ln more deLall ln 8ox l,
however, ln Lhe lrlsh conLexL lL ls also speclfled as Lhe mechanlsm Lhrough whlch an upper llmlL on
Ceneral CovernmenL expendlLure ls deLermlned. ln effecL Lhe L8 has been adopLed as an
expendlLure growLh rule for lreland. 1he aggregaLe CovernmenL LxpendlLure celllng (CLC) and Lhe
lndlvldual MlnlsLerlal celllngs Lhen boLh operaLe as mechanlsms Lo conLrol Lxchequer expendlLure
wlLh Lhls upper llmlL. 8oLh Lhe CLC and lndlvldual MlnlsLerlal celllngs are seL on a nomlnal, Lhree

140
volume l of Lhe kepott of tbe 5peclol Ctoop oo lobllc 5etvlce Nombets ooJ xpeoJltote ltoqtommes (2009)
compared Lhe Lhree-year expendlLure pro[ecLlons LhaL were publlshed each year ln Lhe annual 8udgeL volumes for 2000
Lo 2006 agalnsL Lhe acLual ouLLurns for expendlLure ln each of Lhose years and deLermlned LhaL whlle Lhe flrsL-year
ouLLurns Lyplcally came wlLhln 1 per cenL of Lhe pro[ecLlon, Lhe second-year ouLLurns came ln ahead of pro[ecLlon by 6
per cenL on average, whlle Lhe Lhlrd-year ouLLurn overran by around 12 per cenL on average.
141
hLLp://clrculars.gov.le/pdf/clrcular/per/2013/13.pdf
Aooex n. 1be MeJlom-1etm xpeoJltote ltomewotk

113

year rolllng basls. 1he more deLalled arrangemenLs for Lhe operaLlon of Lhe M1Ll are dlscussed
below.
CCVLkAGL
1he deflnlLlon of 'CovernmenL expendlLure' as seL ouL ln Lhe Mlolstets ooJ 5ectetotles
(AmeoJmeot) Act 201J ls equlvalenL Lo Lhe gross voLed LoLal expendlLure aggregaLe shown ln Lhe
8udgeL and LsLlmaLes documenLaLlon. 1he CLC covers currenL and caplLal expendlLure by
ueparLmenLs funded by Lhe Lxchequer and Lhrough approprlaLlons-ln-ald and Lhe expendlLure of
Lhe Soclal lnsurance lund and Lhe naLlonal 1ralnlng lund. ConsequenLly, Lhe CLC does noL lnclude
(l) debL lnLeresL cosLs or oLher non-voLed expendlLure flnanced dlrecLly from Lhe CenLral lund or (ll)
non-CenLral CovernmenL expendlLure lncludlng Lhe Local CovernmenL secLor. ln addlLlon, whlle
cycllcally relaLed paymenLs, speclflcally unemploymenL relaLed cosLs, and Lu co-funded
expendlLure are lncluded wlLhln Lhe celllngs, Lhe Clrcular speclfles LhaL Lhese lLems be LreaLed
dlfferenLly.
142

ln lLs mosL recenL assessmenL, Lhe Luropean Commlsslon polnL Lo Lhe lnconslsLency beLween Lhe
coverage of Lhe CLC and Lhe expendlLure benchmark, whlch applles Lo Lhe general CovernmenL
secLor buL expllclLly excludes lnLeresL expendlLure, non-dlscreLlonary changes ln unemploymenL
beneflL expendlLure and dlscreLlonary expendlLure lncreases fully offseL by dlscreLlonary revenue
lncreaslng measures.
143

1he Local CovernmenL, whlle lncluded ln Lhe L8 celllng on Ceneral CovernmenL expendlLure, ls noL
lncluded wlLhln Lhe CLC. lnsLead, Lhe Clrcular refers Lo a proLocol Lo conLrol and monlLor Lhe local
auLhorlLles conLrlbuLlon Lo Lhe Ceneral CovernmenL 8alance. Powever, a deflclL-based
arrangemenL allows scope for Lhe Local CovernmenL SecLor Lo lncrease expendlLure on Lhe basls of
buoyanL, non-dlscreLlonary, recelpLs and consequenLly cause elLher a breach of Lhe L8 or requlre a
change Lo Lhe CLC, all oLher Lhlngs belng equal. 1o avold Lhls, clear resLrlcLlons should be puL ln
place around Local CovernmenL expendlLure, expllclLly expandlng Lhe proLocol Lo lnclude
expendlLure resLrlcLlons.

142
1he Clrcular speclfles LhaL Lhese paymenLs be re-vlslLed each year and where Lhe flnal ouLLurn for Lhe year ls less
Lhan Lhe allocaLed amounL on Lhese paymenLs, Lhe dlfference wlll auLomaLlcally accrue Lo Lhe beneflL of Lhe Lxchequer,
raLher Lhan be Lransferred across Lo fund Lhe expanslon of oLher servlces.
143
hLLp://ec.europa.eu/economy_flnance/publlcaLlons/occaslonal_paper/2013/pdf/ocp162_en.pdf
116

kLVI SI CN CI CLI LI NGS]"LSCAL CLAUSLS"
1hree clrcumsLances, or escape clauses", are speclfled under whlch Lhe aggregaLe CLC can be
revlsed:
(l) under excepLlonal clrcumsLances as deflned under Lhe llscol kespooslblllty Act 2012 and
2013,
144

(ll) Lhrough Lhe lnLroducLlon of compensaLory revenue measures, and

(lll) speclal arrangemenLs for cycllcally relaLed unemploymenL spendlng and cerLaln expendlLure
funded Lhrough Lu recelpLs.

1here are slx clrcumsLances ldenLlfled whereby Lhe apporLlonmenL of fundlng Lo ueparLmenLs can
be revlsed, lncludlng:
(l) an lncrease ln Lhe CLC,
(ll) pollcy change arlslng from Lhe ouLcome of a Comprehenslve 8evlew of LxpendlLure,
(lll) for good and presslng reasons of publlc pollcy" or a change ln Lhe dlvlslon of funcLlons
beLween ueparLmenLs,
(lv) as a resulL of a poLenLlal breach ln celllngs requlrlng a SupplemenLary LsLlmaLe,
(v) arlslng from Lhe arrangemenLs ln place for unforeseen varlaLlons ln cycllcal and Lu co-
funded expendlLure, or
(vl) arlslng from Lhe appllcaLlon of carryover savlngs or as Lhe resulL of sancLlons.
Whlle Lhe number of lnsLances ln whlch Lhe CLC can be alLered ls now relaLlvely llmlLed, Lhe
capaclLy of CovernmenL Lo adhere, and be seen Lo adhere, Lo Lhese resLrlcLlons has noL been
esLabllshed. Where Lhe CLC ls revlsed, Lhe speclflc provlslon under whlch lL ls belng ad[usLed musL
be speclfled ln Lhe accompanylng documenLaLlon.
CCN1kCL MLCnANI SMS
1he conLrol mechanlsms for ueparLmenLs are broken lnLo Lhree escalaLlng levels of sancLlon, wlLh
Lhe appllcaLlon of each auLomaLlcally requlrlng a proposal Lo CovernmenL for declslon by Lhe
MlnlsLer for ubllc LxpendlLure and 8eform as parL of Lhe normal monLhly reporLlng process Lo
CovernmenL. 1he lnlLlal level ls Lrlggered where a ueparLmenL's gross expendlLure ls above Lhe

144
ln Lhls conLexL excepLlonal clrcumsLances are (l) a perlod durlng whlch an unusual evenL ouLslde Lhe conLrol of Lhe
SLaLe has a ma[or lmpacL on Lhe flnanclal poslLlon of Lhe Ceneral CovernmenL, or (ll) a perlod of severe economlc
downLurn.
Aooex n. 1be MeJlom-1etm xpeoJltote ltomewotk

117

publlshed monLhly proflle for Lwo consecuLlve monLhs or can be Lrlggered by Lhe ueparLmenL of
ubllc LxpendlLure and 8eform lf felL necessary. 1he lmposlLlon of Lhese sancLlon arrangemenLs ls
seml-auLomaLlc as Lhey escalaLe a declslon Lo MlnlsLerlal/CovernmenLal level buL requlre declslons
by CovernmenL Lo lmplemenL Lhe sancLlons aL each sLage. 1he LransparenL llnklng of sancLlons Lo
Lhe publlc proflles ls lmporLanL as any fallure Lo lmplemenL Lhe conLrols wlll be evldenL. 1he
sancLlons range from more lnLense reporLlng and monlLorlng arrangemenLs, Lo a formal exLernal
expendlLure revlew wlLh a requlremenL Lo lmplemenL recommendaLlons, Lo Lhe repaymenL of
excess expendlLure from fuLure celllng(s).
CAkkCVLk CI CUkkLN1 SAVI NGS
Slmllar Lo Lhe mechanlsm ln place under Lhe caplLal expendlLure envelopes, Lhe M1Ll permlLs Lhe
carryover of currenL expendlLure savlngs from one year lnLo Lhe nexL under varylng arrangemenLs
dependlng on Lhe level of savlngs as a proporLlon of Lhe celllng. lL ls speclfled expllclLly LhaL any
savlngs carrled over musL be ln compllance wlLh Lhe CLC and overall flscal rules and may noL be
used Lo creaLe an ongolng llablllLy Lo Lhe Lxchequer.
143

kLCCNCI LI A1I CN CI CLI LI NGS
1he Clrcular commlLs LhaL any changes Lo celllngs wlll be reconclled fully. 8econclllaLlon Lables were
lncluded ln Lhe recenL xpeoJltote kepott 2014 for Lhe CLC and MlnlsLerlal expendlLure celllngs.
LkI CDI C kLVI LWS CI LkLNDI 1UkL
ApproxlmaLely every Lhree years a comprehenslve revlew of expendlLure wlll be conducLed. 1hls
allows for re-prlorlLlsaLlon beLween MlnlsLerlal celllngs whlle respecLlng Lhe overall CLC. lL also
guards agalnsL a reLurn Lo a 'boLLom-up' lncremenLal approach and should lead Lo an lncreased
focus on evaluaLlon of exlsLlng programmes and schemes.
DLAk1MLN1AL CCN1I NUI 1 kLSLkVLS
ConLlnulLy reserves are referenced ln Lhe Clrcular buL have noL yeL been formally lnLroduced. 1hese
reserves should provlde ueparLmenLs wlLh lndlvlduallsed buffers wlLhln Lhelr MlnlsLerlal celllng Lo
allow modesL budgeL devlaLlons Lo be managed ln a rouLlne manner wlLhouL requlrlng Lhe
lmposlLlon of sancLlons. 1he causes and consequences of larger devlaLlons should be assessed and
a dlrecL pollcy response consldered lf necessary. 1he lnLroducLlon and operaLlon of Lhese reserves

143
A llmlLaLlon on Lhe carryover of savlngs ls LhaL Lhe lncrease ln Lhe followlng year's MlnlsLerlal celllngs arlslng from
carrled over savlngs cannoL cause a breach of Lhe CLC. Accordlngly, provlslon would have Lo be made when seLLlng
MlnlsLerlal celllngs Lo allow 'space' beLween Lhe CLC and Lhe aggregaLe of Lhe MlnlsLerlal celllngs.
118

should be consldered carefully, parLlcular Lhe lmpacL on Lhe lncenLlve sLrucLure under Lhe exlsLlng
sancLlon/carryover mechanlsms. AnoLher lmporLanL conslderaLlon ls wheLher an aggregaLe reserve
or lndlvldual ueparLmenLal reserves are more approprlaLe. Whlle an aggregaLe reserve would
allow flexlblllLy for CovernmenL Lo address excepLlonal clrcumsLances as Lhey arlse, lL could lead Lo
'gamlng' on Lhe parL of ueparLmenLs Lo obLaln addlLlonal fundlng.

Aooex l. llscol kespooslblllty Act ooJ u llscol koles

119

AnnLx l: llSCAL 8LSCnSl8lLl1? AC1 Anu Lu llSCAL 8uLLS
1he llscol kespooslblllty Act (l8A) and Lu flscal rules are complex, boLh lndlvldually and Laken
LogeLher, as seL ouL ln prevlous llscol Assessmeot kepotts. 1here are Lhree baslc requlremenLs:
! 1he l8A 8udgeLary 8ule seLs a norm of a headllne budgeL balance or surplus for Lhe Ceneral
CovernmenL, whlle Lhe Lu SC requlres a deflclL of less Lhan 3 per cenL of Cu.
! 1he l8A 8udgeLary 8ule and Lu SC requlre Lhe sLrucLural budgeL balance Lo meeL an Lu-
agreed counLry-speclflc Medlum 1erm 8udgeLary Cb[ecLlve (M1C), whlch ls currenLly for a
balanced budgeL ln sLrucLural Lerms. lf Lhls condlLlon ls noL meL, a 0.3 percenLage polnL
lmprovemenL ln Lhe sLrucLural budgeL balance ls requlred under Lhe 8udgeLary 8ule
(Ad[usLmenL aLh CondlLlon) and Lu rules.
146

! 1he l8A uebL 8ule and Lu SC requlre LhaL a Ceneral CovernmenL debL-Lo-Cu raLlo ln excess
of 60 per cenL of Cu should be reduced accordlng Lo a formula LhaL requlres approxlmaLely a
1/20Lh reducLlon of Lhe excess over 60 per cenL per year.
1he condlLlons for meeLlng Lhe l8A 8udgeLary 8ule can be represenLed uslng a flow dlagram:
147

146
lL ls lmporLanL Lo noLe LhaL Lhe l8A 8udgeLary 8ule and M1C are noL ldenLlcal Lo Lhe exLenL LhaL Lhe l8A 8udgeLary
8ule could be meL by a headllne budgeL balance, even lf Lhere were a sLrucLural deflclL larger Lhan Lhe M1C. 1hls could
arlse, for example, wlLh an ouLpuL gap greaLer Lhan Lwo percenLage polnLs.
147
1here ls more Lhan one way of presenLlng Lhe rules ln Lerms of a flow dlagram. 1hls broadly follows Lhe order ln
whlch Lhe condlLlons are speclfled ln Lhe LexL of Lhe lkA 2012.

120

AnnLx !: lLLuS18A1lvL SCLnA8lCS ln 5lu 201J
AnnLx 1A8LL ! . 1: 5lu 201J l LLuS18A1l vL SCLnA8l C 2016- 2019
8udgetary |ans 2016 2017 2018 2019
1. Genera| Government 8a|ance -1.7 -1.2 -0.3 0.8
2. Structura| 8a|ance -2.4 -1.7 -0.4 1.0
3. Cyc||ca| 8udgetary Component 0.8 0.3 0.1 -0.2
4. Cne-offs and Cther 1emporary
Measures
0.0 0.0 0.0 0.0
S. Genera| Government 8a|ance -1.7 -1.2 -0.3 0.8
6. 1ota| kevenues 34.8 34.3 34.2 33.9
6.a. 1ota| kevenues at Unchanged
o||cy from 2012
n.a n.a n.a n.a
7. 1ota| Lxpend|ture 36.3 33.8 34.3 33.1
Amounts 1o 8e Lxc|uded from the Lxpend|ture 8enchmark
7.a. Interest Lxpend|ture 4.8 4.8 4.8 4.7
7.b. Lxpend|ture on LU
rogrammes Iu||y Matched by
LU Iunds kevenue
0.2 0.2 0.2 0.2
7.c. Cyc||ca| Unemp|oyment 8enef|t
Lxpend|ture***
-0.4 -0.3 -0.3 -0.4
7.d. Lffect of D|scret|onary
kevenue Measures
n.a n.a n.a n.a
7.e. kevenue Increases
Mandated 8y Law
0.0 0.0 0.0 0.0
8. 1ax 8urden* 31.3 31.3 31.2 30.9
9. Gross Debt** 110.8 107.9 103.6 97.9
5ootce. ltlsb 5toblllty ltoqtomme Aptll 201J upJote.

Aooex I. lllosttotlve 5ceootlos lo 5lu 201J

121

AnnLx 1A8LL ! . 2: 5lu 2013 l LLuS18A1l vL SCLnA8l C: MAC8CLCCnCMl C ASSuM1l CnS,
2016- 2019
2016 2017 2018 2019
1. kea| GD Growth 2.7 2.3 3.0 3.3
2. Nom|na| GD Growth 4.2 3.8 4.3 4.8
3. GD Def|ator Growth 1.4 1.3 1.3 1.3
otent|a| GD Growth 2.6 2.9 3.7 4.1
Cutput Gap 1.6 1.0 0.3 -0.3
Lmp|oyment ersons (000s) 1.4 1.3 1.3 1.3
nours Worked 0.6 0.6 0.6 0.6
Unemp|oyment kate 12.3 11.3 11.0 11.0
Gross I|xed Cap|ta| Iormat|on 4.3 7.0 8.0 10.0
Compensat|on er Lmp|oyee 3.3 3.2 3.7 3.7
5ootce. ueparLmenL of llnance CalculaLlons, ltlsb 5toblllty ltoqtomme Aptll 201J upJote.
Note. llgures may noL sum due Lo roundlng.

Clossoty

122

GLCSSAk
148

Automat|c stab|||sers: leaLures of Lhe Lax and spendlng reglme whlch reacL auLomaLlcally Lo Lhe
economlc cycle and reduce lLs flucLuaLlons. As a resulL, Lhe budgeL balance ln per cenL of Cu Lends
Lo lmprove ln years of hlgh growLh, and deLerloraLe durlng economlc slowdowns.
8udget ba|ance: 1he balance beLween LoLal publlc expendlLure and revenue ln a speclflc year, wlLh
a poslLlve balance lndlcaLlng a surplus and a negaLlve balance lndlcaLlng a deflclL. lor Lhe
monlLorlng of Member SLaLe budgeLary poslLlons, Lhe Lu uses general governmenL aggregaLes.
Cyc||ca| component of budget ba|ance: 1haL parL of Lhe change ln Lhe budgeL balance LhaL follows
auLomaLlcally from Lhe cycllcal condlLlons of Lhe economy, due Lo Lhe reacLlon of publlc revenue
and expendlLure Lo changes ln Lhe ouLpuL gap.
D|scret|onary f|sca| po||cy: Change ln Lhe budgeL balance and ln lLs componenLs under Lhe conLrol
of governmenL. lL ls usually measured as Lhe resldual of Lhe change ln Lhe balance afLer Lhe
excluslon of Lhe budgeLary lmpacL of auLomaLlc sLablllsers.
Lxcess|ve Def|c|t rocedure (LD): A procedure accordlng Lo whlch Lhe Commlsslon and Lhe
Councll monlLor Lhe developmenL of naLlonal budgeL balances and publlc debL ln order Lo assess
and/or correcL Lhe rlsk of an excesslve deflclL ln each Member SLaLe.
Lxpend|ture ru|es: A subseL of flscal rules LhaL LargeL (a subseL of) publlc expendlLure.
I|sca| conso||dat|on: An lmprovemenL ln Lhe budgeL balance Lhrough measures of dlscreLlonary
flscal pollcy, elLher speclfled by Lhe amounL of Lhe lmprovemenL or Lhe perlod over whlch Lhe
lmprovemenL conLlnues.
Genera| Government: As used by Lhe Lu ln lLs process of budgeLary survelllance under Lhe SLablllLy
and CrowLh acL and Lhe excesslve deflclL procedure, Lhe general governmenL secLor covers
naLlonal governmenL, reglonal and local governmenL, as well as soclal securlLy funds. ubllc
enLerprlses are excluded, as are Lransfers Lo and from Lhe Lu 8udgeL.
Maastr|cht reference va|ues for pub||c debt and def|c|ts: 8especLlvely, a 60 per cenL Ceneral
CovernmenL debL-Lo-Cu raLlo and a 3 per cenL Ceneral CovernmenL deflclL-Lo-Cu raLlo. 1hese
Lhresholds are deflned ln a proLocol Lo Lhe MaasLrlchL 1reaLy on Luropean unlon.

148
1hese deflnlLlons are Laken dlrecLly from Lhe Luropean Commlsslon. See Luropean Lconomy, Cccaslonal apers 131,
May 2013, vade medum on Lhe SLablllLy and CrowLh acL.
Clossoty

123

Med|um-term budgetary framework: An lnsLlLuLlonal flscal devlce LhaL leLs pollcy-makers exLend
Lhe horlzon for flscal pollcy maklng beyond Lhe annual budgeLary calendar (Lyplcally 3-3 years).
1argeLs can be ad[usLed under medlum-Lerm budgeLary frameworks (M18l) elLher on an annual
basls (flexlble frameworks) or only aL Lhe end of Lhe M18l horlzon (flxed frameworks).
Med|um-term budgetary ob[ect|ve (M1C): Accordlng Lo Lhe reformed SLablllLy and CrowLh acL,
sLablllLy programmes and convergence programmes presenL a medlum-Lerm ob[ecLlve for Lhe
budgeLary poslLlon. lL ls counLry-speclflc Lo Lake lnLo accounL Lhe dlverslLy of economlc and
budgeLary poslLlons and developmenLs as well as of flscal rlsks Lo Lhe susLalnablllLy of publlc
flnances, and ls deflned ln sLrucLural Lerms.
M|n|mum benchmarks: 1he lowesL value of Lhe sLrucLural budgeL balance LhaL provldes a safeLy
margln agalnsL Lhe rlsk of breachlng Lhe MaasLrlchL reference value for Lhe deflclL durlng normal
cycllcal flucLuaLlons. 1he mlnlmum benchmarks are esLlmaLed by Lhe Luropean Commlsslon. 1hey
do noL caLer for oLher rlsks such as unexpecLed budgeLary developmenLs and lnLeresL raLe shocks.
1hey are a lower bound for Lhe medlum-Lerm budgeLary ob[ecLlves (M1C).
Cne-off and temporary measures: CovernmenL LransacLlons havlng a LranslLory budgeLary effecL
LhaL does noL lead Lo a susLalned change ln Lhe budgeLary poslLlon.
Cutput gap: 1he dlfference beLween acLual ouLpuL and esLlmaLed poLenLlal ouLpuL aL any parLlcular
polnL ln Llme.
otent|a| GD: 1he level of real Cu ln a glven year LhaL ls conslsLenL wlLh a sLable raLe of lnflaLlon.
lf acLual ouLpuL rlses above lLs poLenLlal level, Lhen consLralnLs on capaclLy begln Lo blnd and
lnflaLlonary pressures bulld, lf ouLpuL falls below poLenLlal, Lhen resources are lylng ldle and
lnflaLlonary pressures abaLe.
r|mary budget ba|ance: 1he budgeL balance neL of lnLeresL paymenLs on general governmenL
debL.
r|mary structura| budget ba|ance: 1he sLrucLural budgeL balance neL of lnLeresL paymenLs.
ro-cyc||ca| f|sca| po||cy: A flscal sLance whlch ampllfles Lhe economlc cycle by lncreaslng Lhe
sLrucLural prlmary deflclL durlng an economlc upLurn, or by decreaslng lL ln a downLurn. A neuLral
flscal pollcy keeps Lhe cycllcally-ad[usLed budgeL balance unchanged over Lhe economlc cycle buL
leLs Lhe auLomaLlc sLablllsers work.
ub||c debt: ConsolldaLed gross debL for Lhe general governmenL secLor. lL lncludes Lhe LoLal
nomlnal value of all debL owed by publlc lnsLlLuLlons ln Lhe Member SLaLe, excepL LhaL parL of Lhe
debL whlch ls owed Lo oLher publlc lnsLlLuLlons ln Lhe same Member SLaLe.

124

Sovere|gn bond spread: 1he dlfference beLween rlsk premlums lmposed by flnanclal markeLs on
soverelgn bonds for dlfferenL sLaLes. Plgher rlsk premlums can largely sLem from (l) Lhe debL
servlce raLlo, also reflecLlng Lhe counLrles ablllLy Lo ralse Lhelr Laxes for a glven level of Cu, (ll) Lhe
flscal Lrack record, (lll) expecLed fuLure deflclLs, and (lv) Lhe degree of rlsk averslon.
Stab|||ty and Growth act (SG): Approved ln 1997 and reformed ln 2003 and 2011, Lhe SC
clarlfles Lhe provlslons of Lhe MaasLrlchL 1reaLy regardlng Lhe survelllance of Member SLaLe
budgeLary pollcles and Lhe monlLorlng of budgeL deflclLs durlng Lhe Lhlrd phase of LMu. 1he SC
conslsLs of Lwo Councll 8egulaLlons seLLlng ouL legally blndlng provlslons Lo be followed by Lhe
Luropean lnsLlLuLlons and Lhe Member SLaLes and Lwo 8esoluLlons of Lhe Luropean Councll ln
AmsLerdam (!une 1997).
Stab|||ty programmes: Medlum-Lerm budgeLary sLraLegles presenLed by Lhose Member SLaLes LhaL
have already adopLed Lhe euro. 1hey are updaLed annually, accordlng Lo Lhe provlslons of Lhe
SLablllLy and CrowLh acL.
Stock-f|ow ad[ustment: 1he sLock-flow ad[usLmenL (also known as Lhe debL-deflclL ad[usLmenL)
ensures conslsLency beLween Lhe neL borrowlng (flow) and Lhe varlaLlon ln Lhe sLock of gross debL.
lL lncludes Lhe accumulaLlon of flnanclal asseLs, changes ln Lhe value of debL denomlnaLed ln
forelgn currency, and remalnlng sLaLlsLlcal ad[usLmenLs.
Structura| budget ba|ance: 1he acLual budgeL balance neL of Lhe cycllcal componenL and one-off
and oLher Lemporary measures. 1he sLrucLural balance glves a measure of Lhe underlylng Lrend ln
Lhe budgeL balance.
5ootces

123

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5ootces

127

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