Thursday 20 October 2016

Budget 2016: Ireland's plans 'broadly compliant' but four countries risk breaking EU rules

Sarah Collins and Colm Kelpie

Published 17/11/2015 | 11:23

Minister for Finance Michael Noonan
Minister for Finance Michael Noonan

Ireland should use recent revenue windfalls to pay down its debts, the European Commission has said, hinting that next year’s budget might be too expansionary.

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In its annual series of opinions on EU countries’ draft budgets, the Commission said that while Budget 2016 was “broadly compliant” with EU rules, the extra government spending announced last month could put Ireland at risk of breaching European guidelines next year if it is not matched by savings elsewhere.

Meanwhile, Italy, Lithuania, Austria and Spain risk breaking European Union rules with their 2016 budget plans, the European Commission said on Tuesday, while France might also not meet some of the fiscal targets set out by EU finance ministers.

The opinion comes just two weeks after the Commission predicted Ireland’s economy would grow at 6pc this year, three times the EU average, and continue growing above average in 2016.

It also said that Ireland’s budget deficit has come down under the EU’s upper limit of 3pc of gross domestic product and will stay well below it this year and next.

EU economics chief Pierre Moscovici told reporters today [TUES] that Ireland’s budget “doesn’t preoccupy [the Commission] particularly”, despite the concerns over spending expressed in the budget opinion - which was unanimously adopted by all 28 EU commissioners.

The opinion comes just weeks after concerns were raised by the Irish Fiscal Advisory Council that the extra spending announced for 2016 could be too expansionary.

“Overall, the Commission is of the opinion that the Draft Budgetary Plan of Ireland … is broadly compliant with the provisions of the Stability and Growth Pact,” the Commission said.

Finance Minister Michael Noonan welcomed the Commission’s opinion.

“For next year, the Commission considers that the Budget is “broadly compliant” with the provisions of the Stability and Growth Pact (SGP),” Mr Noonan said.

“In particular, the improvement in the structural balance (estimated by the Commission to be 0.9 per cent) is greater than the 0.6pc required under the rules.  This is further evidence that Ireland is moving towards a balanced budget in structural terms more rapidly than is required.

“I also note that the Commission has identified some risk, though not significant, in relation to the expenditure benchmark. This is why we need to maintain a tight control of expenditure and my cabinet colleagues and I are committed to this strategy.”

The Commission said, however, that the costs of Europe's migrant and refugee crisis would be treated as a special case.

The Commission, the EU executive arm, checks draft budget plans of euro zone countries every year to see if they are in line with the Stability and Growth Pact, which sets rules for EU budgets.

The rules say a government has to keep the headline budget shortfall below 3 percent of GDP and strive to balance its books in structural terms - excluding one-off revenues and spending and the effects of the business cycle.

To be in line with the rules, each year governments must reduce their structural deficit by at least 0.5 percent of GDP until they are close to balance or in surplus.

The Commission pointed the finger this year at Italy, Lithuania, Austria and Spain.

"The draft budgetary plans of these countries might result in a significant deviation from the adjustment paths towards the medium-term objective," its said.

France's 2016 draft budget was broadly compliant, the Commission said, because the headline deficit was as required.

But France is under a disciplinary EU process, called the excessive deficit procedure, for having a budget gap higher than 3 percent of GDP. EU finance ministers set annual fiscal consolidation targets for countries under this procedure.

The Commission said Paris was at risk of missing these targets.

"In the case of France, while the recommended headline deficit target is projected to be met in 2016, the (draft budget) contains risks as regards compliance ... as the fiscal effort is projected to fall significantly short of the recommended level, according to all metrics," the Commission said.

It said that it asked the French authorities to take the "necessary measures within the national budgetary process" so that the 2016 budget is in line with EU rules.

Without changes in current policies, France is also expected to have a deficit above the 3 percent limit in 2017, in breach of agreed targets, the Commission estimated.

Brussels' analysis of France's budget was carried out before the Paris attacks of last weekend.

Spain, which faces elections in December, was in bigger trouble.

"The draft budget plan... was found to pose a risk of non-compliance with the requirements for 2016. In particular, neither the recommended fiscal effort nor the headline deficit target for 2016 is forecast to be achieved," the Commission said confirming an opinion issued in October.

It said it had asked Madrid to make sure the budget would comply with EU rules and asked for a updated draft as soon as possible.

Italy's draft budget plan is also at risk of non-compliance with EU fiscal rules, the Commission said in a statement, urging Italy to take "the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant".

The Commission will decide in May whether Italy can be granted some budget leeway for investments and structural reforms.


It also said that the budget costs of the migrant crisis would be treated as an exceptional circumstance and not counted into the deficit calculations, but concessions will be made only after actual expenses are properly assessed.

Italy, Greece, Austria and Germany are all dealing with hundreds of thousands of asylum seekers from the Middle East and Africa who are fleeing conflicts and poverty in their countries.

The Commission said it would monitor the situation closely to determine what was eligible and ensure that it did not impact 2015 and 2106 budget enforcement.

Overall, the aggregate euro zone budget deficit is to shrink to 1,7 percent in 2016 from 1.9 percent in 2015. Debt is also to fall slightly to just below 90 percent of GDP. The Commission said this represented a neutral fiscal stance.

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