Business Irish

Friday 2 December 2016

Fiscal space: Five reasons it's a talking point ahead of the general election

Published 01/02/2016 | 10:12

The tongue in-cheek advertisement depicts the political rivals sharing a tender moment
The tongue in-cheek advertisement depicts the political rivals sharing a tender moment

The financial crisis threw up all kinds of buzz words and terms, as if further confusion was needed, from credit crunch to liquidity squeeze.

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And now, ahead of election 2016, much debate is centering on fiscal space and how much money the new Government will have to spend in its lifetime.

So, according to our own Department of Finance, fiscal space is defined as the amount of money available to the Government in the medium term after EU Fiscal rules including expenditure ceilings are taken into account.

But it's a grey area, to say the least.

Peter Heller, the former Deputy Director of the Fiscal Affairs Department at the IMF, in his 2005 paper on the subject wrote: "Yet the concept of “fiscal space” remains fuzzy— the term is now frequently used in current policy debates but without clarity as to its meaning."

Here are five reasons why it's important ahead of the election:

1. Origins: Many IMF-supported countries, in Latin America and Europe particularly, argued that fiscal constraints should be relaxed to accommodate additional borrowing to finance infrastructure projects. As a former programme country, the debate here has kicked off.

2. Different figures: Different parties are giving different figures around the fiscal space. The Labour Party said at the weekend that the figure would be just over €12bn. But the Department of Finance's number is €8.6bn. But the actual figure depends on the tax reduction, expenditure increases or debt reduction measure taken by the next government. It also depends on growth. See table c51 here:

3. Efficiencies: Mr Heller also said that fiscal space can be created by implementing efficient expenditure programmes. He added that this would be suitable even in favoured sectors like achieving minimum pupil-teacher ratios and rationalizing the approach to delivering medical care.

4. Warning 1: John McHale, the chairman of the Fiscal Advisory Council, has estimated that the amount of money available to the next government is much less at just over €3bn.

5. Warning 2: Mr Heller concluded that "judgments on fiscal space are inherently country specific, requiring detailed assessments of a government’s initial fiscal position, its revenue and expenditure structure, the characteristics of its outstanding debt obligations, the underlying structure of its economy, the prospects for enhanced external resource inflows, and a perspective on the underlying external conditions facing an economy." Against the backdrop of the fragilities in the world economy currently, that's a big warning.

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