Prepared by Arild J. Lund
The structural deficit is calculated using estimates of the output gap derived by applying the production function approach, see Chapter II, and OECD Economic Studies 24, 1995, Potential Output, Output Gaps and Structural Budget Balances. See section D for the impact on the structural balance of employing alternative methods for calculating potential output.
This point was made in Giavazzi and Pagano: Can Severe Fiscal Contractions be Expansionary?, in O. Blanchard and S. Fisher (eds.), National Bureau of Economic Research, Macroeconomic Annual 1990, Cambridge, MA; MIT Press. A similar argument was also developed by McAleese in Ireland’s Economic Recovery, Irish Banking Review, Summer 1990.
Phillip R. Lane, On the Cyclicality of Irish Fiscal Policy, in the Economic and Social Review, Dublin, January 1998, provides new evidence of a procyclical fiscal policy in Ireland.
The elasticity of potential output with respect to changes in labor input has been estimated at 0.65, while the elasticity of structural revenues with respect to the output gap has been estimated at 1.08.
Arguably, changes in capital inputs and total factor productivity growth have a much smaller impact on the structural balance and therefore can be left out when calculating the contribution of supply–side factors to changes in the structural balance. Although a higher contribution of supply–side factors to changes in the structural balance. Although a higher level of capital would increase potential output, it would also be associated with a lower structural revenue ratio because of the lower taxation of capital income than of labor income and because of a reduction in revenues from VAT or sales taxes. As for the effect of higher productivity, it is reasonable to assume that higher productivity results in higher nominal wages in the business sector. If public wages and other public expenditure are indexed de facto to business sector wages, as they probably are in the longer term, higher total factor productivity would not affect the structural balance either.
Part of the fall in expenditure reflected accounting changes.
It should be noted that this method calculates the impact of fiscal policy as a residual and that other policy measures are not taken into account. Clearly, economic policy during the 1990s has contributed to the improvement in the fiscal position through other indirect channels, for instance through labor market reforms or income policies that helped reduce structural unemployment and raise economic growth.
Detailed information on expenditures in 1997 is available only on a cash basis (which is the basis employed in the Exchequer Accounts). The central government covers the difference between the social insurance contributions and the expenditure of the social insurance fund. Contributions soared in 1997 due to the strong economy and the government transfers needed to cover the deficit turned out to be IR£150 million less than budgeted.
The Small Savings schemes are tax exempt savings instruments aimed at financing public deficits. Interest payments are not due until the redemption of the saving certificate and as many investors have rolled over their investment the Schemes have built up considerable liabilities in the form of accrued interest payments. The Small Savings Reserve Fund is set up to fund those accrued interest liabilities.
Capital expenditure was budgeted to increase by as much as 23 percent from 1997 to 1998 because of extra allocations to education (the Scientific and Technological Education Fund) and environmentally based investment in infrastructure, and to a smaller extent extra allocations for the health sector and prison buildings.
A general government deficit in excess of 3 percent of GDP will be considered exceptional and temporary, and the country will not be subject to an excessive deficit finding and the sanctions associated with it, if the deficit results from an unusual event outside the control of the country in question or from a severe economic downturn, provided also that, should the unusual event or the severe downturn have passed, Commission projections for the following year envisage the deficit falling back to 3 percent or less. See IMF, World Economic Outlook, October 1997 for further details.