Thursday 27 October 2016

Q&A: What is 'fiscal space'?

Published 03/02/2016 | 02:30

John McHale of the Fiscal Advisory Council. Photo: Franck McGrath
John McHale of the Fiscal Advisory Council. Photo: Franck McGrath

Q: What is all this blather about ‘fiscal space’?

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A: Fiscal space is essentially the amount of leeway the next government has, after certain outlays, to spend on tax cuts or spending increases while keeping within tight EU budgetary rules, and without putting the stability of the economy in danger, or jeopardising the sustainability of the State’s finances.

Q: So it’s like having a bit of extra cash at the end of the month to fritter away on whatever you want?

A: The frittering it away on whatever you want bit sounds a tad frivolous.

But it is essentially the maximum room for manoeuvre for the Government.

Q: What factors need to be taken into account when you’re trying to plan what spending leeway you might have?

A: Well, if you’re a household planning five years in advance, you’ll be thinking about how much you’ll earn and how much you’ll need to spend each year, and that will depend on your circumstances.

For example, if you’ve no children now, you might have two at the end of the five-year period, which will put your costs up.

You might also end up caring for an elderly parent. The cost of living will go up over the period, but your wages may not necessarily rise. All of these issues could place pressure on your household economy that you’ll have to factor in.

On the plus side, however, you might expect to get a promotion during that period, or a hike in wages, which may mean your household economy may also improve, making it easier to manage those pressures. It’s the same with a government. It has to estimate what demographic pressures might be placed on the public purse over the coming years.

Q: Why’s it proving so controversial then?

A: Because there’s a big question mark hanging over the amount of fiscal space the Government says it will have over the coming years, and what the Fiscal Advisory Council, the State’s budgetary watchdog, estimates.

Q: How much less?

A: Just over €5bn less.

Q: What? Why the huge difference?

A: Well, the Department of Finance estimates that the amount of fiscal space available between 2017 and 2021, when allowance is made for demographic spending, spending on public capital projects and increases in public sector pay, will be about €8.6bn.

But the department has openly acknowledged that its estimates of spending do not take account of the projected rise in the cost of living over the coming years.

Nor does it take account of increases in public sector pay beyond 2018, when the current Lansdowne Road agreement ends.

The Fiscal Council’s estimate does take account of inflation, and extra public sector pay.

And it thinks more money will be required to deal with demographic pressures than the Department of Finance believes.

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