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We need to overhaul the Stability and Growth Pact and the Fiscal Rules

Posted on March 29, 2017 at 02:50 PM

There is now an urgent need for increased investment in Ireland to Brexit-proof our economy, and put a greater emphasis on social progress. EU member states must be given more flexibility, particularly when it comes to social investment to tackle the rising tide of anti-EU sentiment. The Rainy Day Fund must be applied to meet the challenge of Brexit.

While the broad outlook for the Irish economy over the coming years is generally positive there will nevertheless be a negative impact from Brexit. The Department of Finance has already estimated a loss of 0.5% of GDP growth alone in 2017 before the UK’s exit has even happened.

This impact arises in the short-term as a result of uncertainty over the UK’s future relationship with the EU; and in the long-term as a result of changes to the UK’s relationship with the EU, which will inevitably end up with a more distant relationship than exists at present.

Under a hard Brexit scenario, the ESRI has estimated that the level of Irish GDP would be 3.5% lower five years later, worth €19 billion of lost output, with follow on impacts on employment levels, exports and the deficit. The impact of Brexit will be spread across all sectors and some may benefit. However it is what we will lose that must first be addressed. At a macro European level there are specific actions Ireland can pursue to soften the blow to trade, and economic and social development.

Reforming Europe’s Fiscal Rules Ireland has an historic investment deficit, and our ability to address this now is impeded by the rules of the Stability and Growth Pact (SGP) following our exit from the Excessive Deficit Procedure. At the core of the SGP are rigid targets of a 3% current budget deficit and 60% debt-to-GDP ratio. Brexit presents a major threat to both the EU as a whole, and Ireland’s economy. It will have a destabilising effect on our fiscal policy and annual budgets for the foreseeable future. Targeted capital investment across all impacted sectors to improve competitiveness and address long running underinvestment is needed.

The SGP rules measure fiscal performance, but not social progress, with strict oversight of our debt to GDP ratio and budget deficit; but no routine monitoring of basic poverty levels or underinvestment in infrastructure. An overt focus on fiscal medium-term objectives does not help us solve problems in our health and education systems, transport networks or critical industries. In effect, the rules that govern the European Union are forcing Government inactivity.

With Ireland now in the preventive arm of the SGP, we intend to meet a medium term budgetary objective of a structural deficit of 0.5% by 2018 that will have no rational economic basis when the impact of Brexit hits Ireland. These restrictions must be relaxed in favour of flexible targets consistent with the economic and investment needs of each national economy and movement towards convergence.

At a minimum, the Government must reverse its decision to assign €1 billion a year to a Rainy Day fund from 2019. It is abundantly clear that increased investment will instead be required to meet the challenges of Brexit as a rainy day will have arrived. Current proposals to strengthen the legal basis for the Stability and Growth Pact must also only be agreed by Ireland in return for this flexibility and the incorporation of stronger social criteria relating to job creation, poverty reduction and homelessness.

The December 2016 Prague meeting of the leaders of Europe’s Socialist and Social Democratic Parties, and the Party of European Socialists (PES), agreed to Brendan Howlin’s proposal to re-examine the Stability and Growth Pact and the fiscal rules that flow from it, in order to put a greater emphasis on social progress and to give Eurozone member states more flexibility particularly when it comes to social investment.

 

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