Stephen asked the Minister for Finance 2 questions on the fiscal compact’s debt brake rule:
- the year in which Ireland will first have to comply with the debt brake rule, as described in the Fiscal Compact, that is, reducing Ireland’s debt to GDP ratio from its level in the first year of required compliance, by 1/20th of the difference between that figure and the 60% target stipulated; and if he will make a statement on the matter.
Ref No: 21780/12
Minister for Finance ( Mr Noonan) :
As part of the reforms to the Stability and Growth Pact, contained in the so-called ‘6-pack’ of legislative reforms, Member States with a debt-to-GDP ratio in excess of 60% will have to reduce the part of their debt ratio above the 60% threshold by 1/20th annually. This will have to be done irrespective of the Stability Treaty, though it also forms part of the Treaty.
Ireland and the other Member States currently in excessive deficit on the basis of the deficit criterion are not subject to the debt correction rule at this time. In Ireland’s case, we must first stabilise our debt-to-GDP ratio – it is forecast that this will be achieved next year. After coming out of excessive deficit, and as a Programme country, we will be able to avail of a three-year transition period before the full 1/20th rule will apply. This means that Ireland will not be fully bound by the rule until 2019, though in the 2016-18 period, we will need to make ‘sufficient progress’ in terms of reducing our debt ratio.
Finally, I would also point out that, when it comes to meeting the debt requirement, it is reasonable to expect that economic growth will do most of the ‘heavy lifting’.
And he asked:
- the estimated paydown of general Government debt required to meet the debt brake stipulation, in each of the first five years from when Ireland must adhere to the debt brake rule as stipulated in the Fiscal Compact, that is, ensuring that the debt to GDP ratio reduces by 1/20th of the gap between where it is and the target of 60% of GDP, including the assumptions used per year for real and nominal GDP growth; and if he will make a statement on the matter.
Ref No: 21781/12
Minister for Finance ( Mr Noonan) :
The focus of Government presently is on stabilising the General Government debt to GDP ratio and beginning the process of reducing it to a lower, safer level over time. This will be done through the implementation of further budgetary consolidation as well as policies which foster employment and economic growth.
The recently published Stability Programme Update (SPU) estimates that by the end of current forecast horizon in 2015, the debt to GDP ratio will be 117.4 per cent, down from a peak of 120.3 per cent next year.
The debt correction requirement in the Inter-Governmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union is to reduce that part of the debt ratio which is above the threshold rate of 60 per cent annually by at least one-twentieth of the difference between the actual rate and the threshold rate.
It is important to remember that this requirement is already part of the revised Stability and Growth Pact. We will have to fulfill this requirement irrespective of the Stability Treaty.
A transition period will apply for all countries, including Ireland, that are currently subject to the excessive deficit procedure. During this transition period, which would last for three years following the correction of the excessive deficit, the requirement under the debt correction rule is deemed to be fulfilled if we are making “sufficient progress” towards compliance.
Based on the fiscal projections set out in the recently published SPU, Ireland will be coming out of the excessive deficit procedure by the end of the current forecast horizon as a result of reducing the General Government deficit to below 3 per cent of GDP in 2015. Therefore the three year transition period referred to above will apply. This means that it will be 2019 before the debt correction requirement in the Inter-Governmental Treaty fully kicks in.
As there are presently no specific macroeconomic and fiscal forecasts for the period post 2015, the exact policies that will be required, as well as the level of paydown of General Government debt that would be required to ensure compliance with the Inter-Governmental Treaty debt correction rule are conjecture at this stage.
In terms of the fiscal implications of this debt correction rule, it is important to remember that it is the debt to GDP debt ratio that is important, not the overall nominal level of General Government debt. In other words, on the basis of reasonable assumptions over the medium-term, we can expect economic growth to do much of the work in this regard.