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FactCheck: Do EU rules prevent us from spending money to build more social housing?

FactCheck looks in depth at an AAA-PBP claim with big implications.

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LAST WEEK’S BREXIT vote continues to resonate throughout the European Union, as politicians, the public and the media grapple with their country’s future relationship with Brussels.

And in Ireland, the Anti-Austerity Alliance-People Before Profit has pointed to one difficulty in particular resulting from rules imposed by the EU on our economic and social affairs.

During the week, TDs Paul Murphy, Ruth Coppinger and Mick Barry claimed that EU fiscal rules meant Ireland was barred from deploying additional funding to help solve the housing crisis.

Are they right?

(Remember, if you hear a claim with big implications, but you’re not entirely sure about it, email factcheck@thejournal.ie).

Claim: Ireland is prevented by EU rules from spending more money to build social housing
Verdict: Mostly TRUE

What was said:

Several AAA-PBP representatives have made this particular argument, and Ruth Coppinger articulated it at length in her minority report from the Housing Committee.

But we’re going to take what Paul Murphy said on Tuesday’s Tonight with Vincent Browne on TV3, because it was the most succinct and straightforward version of the claim.

We have the money. We have €5 billion in the Ireland Strategic Investment Fund, formerly the Pension Reserve. So we have it there.
And even if we had more, we cannot use it, even though we have it, because we cannot increase expenditure above the medium-term potential growth rate.

The Facts

22/9/2015. Homeless Famlies Take Over Nama Propert Source: Eamonn Farrell/RollingNews.ie

As they confirmed to FactCheck, what AAA-PBP are talking about here is something called the “expenditure benchmark”, which the Irish Fiscal Advisory Council neatly describes in this way:

The expenditure benchmark essentially says that annual expenditure growth should not exceed the medium-term rate of potential GDP growth, unless the excess is matched by discretionary revenue measures.

Before we check out whether Paul Murphy and his party colleagues are right in their claim, we need to explain a couple of things.

Background

The expenditure benchmark is part of a set of rules, imposed by the EU in a 1997 agreement called the Stability and Growth Pact. All 28 member states are bound by these rules, as part of their membership of the EU.

This is a complicated enough area of EU and Irish law and policy, and you can read more about the background and details of these rules from two independent, reliable sources, here and here.

The key thing to understand is that the Stability and Growth Pact requires Ireland (like every EU member state) to have a debt below 60% of GDP and a yearly deficit below 3% of GDP.

A deficit means that our spending is greater than our revenue in a given year. So the difference between the two cannot amount to more than 3% of our GDP (gross domestic product – a shorthand measure for the size of our entire economy).

Our debt is the total, accumulated amount we owe to various lenders. If it’s above 60% of our GDP (as it is now), then the rules oblige us to take concrete, measured steps to bring it down.

Since 2005, the Stability and Growth Pact has involved each individual EU country being set a target known as a Medium-Term Budgetary Objective, designed to keep their budget deficit/surplus on a steady footing.

(More specifically, it deals with each country’s “structural balance”, which is the same as budget deficit/surplus but adjusts for the effects of economic cycles).

This is where the “expenditure benchmark” comes in.

As part of trying to keep our finances on a steady footing, the government is constrained by the EU rules (which were incorporated into Irish law in the 2012 Fiscal Responsibility Act) from increasing our public spending from one year to the next, above the rate at which our economy is expected to grow in the medium term.

So it’s important to note that the spending restrictions essentially apply to all areas of potential public spending, and not just housing, something that AAA-PBP clearly and readily acknowledge.

The Claim

Irish water tax Source: Brian Lawless/PA

What AAA-PBP contends is that this bar on extra spending means the government can’t invest what it needs to build enough social housing to ease the current crisis.

And that includes spending money already in reserve, such as the €5.4 billion in the Ireland Strategic Investment Fund [ISIF], or the €2.4 billion in NAMA’s cash reserves (as of May).

To support that claim, the party sent us several detailed pieces of evidence, including testimony and statements made by Department of Finance officials.

What do the experts and officials say?

Eoin Dorgan, Principal Officer in the Department of Finance, told the Housing Committee on 31 May:

ISIF expenditure impacts the fiscal rules such that any spending by it in respect of on-balance sheet activity eats into what can be spent on other public services. In other words, it would impact on the expenditure benchmark rule.

He added:

Deputy Coppinger is right that it is difficult to keep social housing provision off-balance sheet.

If spending is on-balance sheet, this means it is counted as general government spending, and therefore is included in structural balance calculations, and subject to the expenditure benchmark rule.

And as quoted by Paul Murphy later in the discussion on Tonight with Vincent Browne, Finance Minister Michael Noonan did indeed tell the Housing Committee on 5 May:

The key problem is not a shortage of money. We can raise the money. The NTMA [which operates ISIF] can raise money for us, it can go into the Exchequer and it can be used for house building.
The problem is that it goes on the balance sheet and then we break the fiscal rules and the expenditure ceilings.

FactCheck asked a number of experts and officials for their evaluation of AAA-PBP’s claim.

11/5/2016. Silicon Valley Announcements Source: Sam Boal/RollingNews.ie

The Department of Finance told us:

…Expenditure funded by money from ISIF would increase expenditure, worsen the deficit and have implications for Ireland’s compliance with the structural balance rule and the expenditure benchmark.

This appears to support the argument made by Murphy, Coppinger, Barry and others.

However, Eddie Casey, an economist at the Irish Fiscal Advisory Council, stipulated that:

ISIF was set up with a statutory mandate to invest on a commercial basis in a manner designed to support economic activity and employment in Ireland. Investment by ISIF on this basis would not impact the calculation of compliance with the fiscal rules.
NAMA also has a commercial mandate and it operates outside of General Government. The expenditure and debt of NAMA does not impact the fiscal aggregates used to assess compliance with the fiscal rules. (Emphasis is added).

Michael Tutty, former Vice-President of the European Investment Bank and now with the Institute of International and European Affairs, said:

My understanding is that government expenditure funded from the Strategic Investment Fund or NAMA cash would count against the expenditure limit.
However funding from the Strategic Investment Fund for housing development undertaken by entities outside the General Government sector would not count and is not subject to this constraint. (Emphasis is added).

Tutty also correctly pointed out that ISIF had already agreed a €500 million housing construction investment program with the New York-based investment firm KKR, which provided the “capacity to fund over 11,000 new homes”.

A spokesperson for ISIF itself told us:

All ISIF investments must be consistent with its legislative mandate to deliver a commercial return and to support economic activity and employment in Ireland.
ISIF is subject to a specific legal requirement that its investments do not have a negative impact on the net borrowing of the State…
All ISIF investments are made on a commercial basis and do not form part of the Government’s balance sheet or Government expenditure.

The spokesperson added:

ISIF has previously stated it is open to investments in social housing that are consistent with its commercial mandate.

Social housing

22/9/2015. Homeless Famlies Take Over Nama Propert Source: Eamonn Farrell/RollingNews.ie

This is a crucial point. As you can see, the experts and officials we consulted had mixed views on whether ISIF and NAMA investment in house building would be limited by the EU expenditure benchmark, or not.

And there appears to be real uncertainty as to whether, even if that €5.4 billion and €2.4 billion can be spent on construction, the commercial mandate of ISIF and NAMA (i.e. to create jobs and get a good return on investment), would allow it to build social housing, which is the basis of AAA-PBP’s argument about solving the housing crisis.

Let’s say ISIF makes an agreement with a developer in the private sector to build social housing.

There is a strong argument that the government would have to subsidise the rents:

  • Firstly, so that it actually functions as social housing
  • Secondly, so that the project makes a return on investment and is commercially viable, which ISIF would require as part of its mandate.

But if an essential part of the project is substantial spending by the government (on subsidising rents), then that spending could well be regarded as on-balance sheet, and therefore constrained by the expenditure benchmark.

Michael Tutty from the Institute of International and European Affairs told us:

The fact that the investment was for social and affordable housing would not in itself affect the issue of whether it is off balance sheet.
However, if the investment  were part of a package under which Exchequer financing was committed to fund the rents or otherwise assist in the repayment of the investment, that would undoubtedly have to be looked at by CSO and Eurostat to assess whether it could really be classified as being outside general government.

In theory, it would be possible for the Departments of Finance and Housing to work with local authorities, the ISIF and NAMA and come up with a way for them to build substantial new social housing without the spending involved going on-balance sheet and falling foul of the EU fiscal rules.

No such strategy has been worked out. NAMA has invested money in delivering social housing – that is, taking existing housing stock and making it available for social housing, and this certainly contributes to easing the housing crisis.

But neither NAMA nor ISIF has invested in building new social housing units, despite the significant funding available to them.

On balance, the available evidence would appear to marginally support AAA-PBP’s contention (largely shared by the Department of Finance) that in practice, as things stand, EU fiscal rules do indeed severely constrain the government’s ability to use ISIF and NAMA to build new social housing.

‘Tax loophole’?

BELGIUM EU CORRUPTION Source: Associated Press

Ultimately, the EU fiscal rules relate to the balance between spending and revenue. But they do not dictate the specifics of how a government arrives at that balance.

As Michael Tutty told us:

Within these constraints, the government has full freedom to decide what it wants to spend the money on or indeed to raise additional taxes to fund additional expenditure. There is no restriction on giving housing priority in terms of expenditure.

A crucial part of the expenditure benchmark is that extra spending is allowed, but only if it is “matched by discretionary revenue measures”, as the Irish Fiscal Advisory Council puts it.

So, in theory, the government could decide to directly spend €1 billion on building social housing, but would have to find €1 billion extra in revenue to make up for it – either through tax increases or freezes, new taxes or charges, or by broadening the tax base.

This is certainly possible. But in reality, it would probably be extremely damaging to the government, politically, which makes it unlikely.

In its last term and during the general election campaign, Fine Gael committed to phasing out the Universal Social Charge, for example, so it is difficult to see where that extra tax revenue would come from.

The government has proposed that a new tax on sugar and further increases to tax on tobacco products would help offset the drop in tax revenues from lowering USC and other measures.

But any additional spending on building new social housing would have to be met by even further increases in tax revenue in the budget for next year and beyond.

Conclusion

It is possible in theory for the government to build significant new social housing without that spending being subject to EU rules.

And the government is already converting existing housing to social housing.

It is also possible for new tax revenue to be found that could offset the impact of extra spending on our structural balance.

But in reality, and in the near-term, it’s difficult to see these conditions being met.

This is due to:

  • The stringency of the expenditure benchmark rule
  • The absence of a clear strategy to use ISIF and NAMA funds to build social housing off-balance sheet (as opposed to commercial housing)
  • The likelihood that the current government will not renege on a firm commitment to cut taxes.

The views of the experts and officials we consulted were mixed, and there is no clear consensus or definitive position on this question.

But on balance, taking everything into account, we very marginally rate this claim Mostly TRUE.  

Send your FactCheck requests to factcheck@thejournal.ie

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About the author:

Dan MacGuill

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