25 September 2012

Irish Central Bank publishes new Economic Letter on Fiscal Compact

The Letter examines the longer-term implications for Ireland of changes in EU budgetary rules set out in the Fiscal Compact. It presents illustrative scenarios demonstrating the ongoing correction in the budgetary position needed to support compliance with these new rules.

In recognition of the high degree of uncertainty surrounding future economic growth outturns, the Letter presents a new fanchart modelling technique. This shows the budgetary implications which could arise, were growth to deviate from its currently projected path.

Although the projections set out in the Letter demonstrate that fiscal targets remain on track to 2015, many uncertainties prevail. Findings confirm that uncertainty around these fiscal projections is high. Notwithstanding this, the Letter notes the government’s commitment to ensure EU-IMF programme (and European Council EDP) targets to 2015 are complied with. The Letter serves to re-affirm that the future fiscal paths depend jointly on policy decisions taken to date and potential exogenous shocks to the economy.

On the basis of currently specified consolidation efforts to 2015, the paper assumes a 0.5 per cent structural improvement per annum from 2016 onwards, in line with the existing Medium Term Objective (MTO) path set for Ireland by the European Commission under the Stability & Growth Pact. The paper does not comment on how much of this necessary correction originates from the benefits of past structural reforms undertaken, relative to how much would need to come in the form of additional consolidation efforts.

The paper finds that on this basis, a structural balance of -0.5 per cent of GDP (the Balance Budget Rule) as required under the Fiscal Compact is reached by 2020. It also finds that compliance with the Debt Rule is achieved before its assumed entry into force in 2019.

Press release

Full letter

© Central Bank of Ireland