Irish Government Debt And Implied Debt Dynamics

6/9/2011

Irish Government Debt And Implied Debt Dynamics: 2011 - 2015

This article examines the debt dynamics facing the Irish State over the period 2011 to 2015. Using medium-term official forecasts on the growth rate and assuming that the official target primary surplus will be achieved, it examines the likely path of the debt out to 2015. It takes account of the reduction in interest rates on EU borrowing agreed at the EU Council meeting on 21st July. However, it makes very conservative assumptions on the interest rate available after 2013, which could well be significantly lower than we have assumed, with consequential beneficial effects on debt sustainability. In addition, the analysis uses the official projections for holdings of liquid assets, which seem very high. Using these assumptions, the base case estimates suggest that the net debt to GDP ratio will peak at between 100 and 105 per cent of GDP in 2013 and that it could fall back to 98 per cent by 2015. The related gross debt to GDP ratio would peak in 2012 at between 110 and 115 per cent of GDP before falling back to between 105 and 110 per cent of GDP by 2015. There are no easy options in tackling the current levels of debt facing the Irish government. The current programme of austerity, with an agreed package of cuts totalling €30 billion over the period 2008-2014, will, on these assumptions, be sufficient to all but eliminate the primary deficit by 2013. However, the very high current levels of debt mean that if growth were to prove less than assumed in the Department of Finance estimates, it would not be sufficient to stabilise the debt to GDP ratio before 2015. On the other hand, a more robust recovery would both improve the primary balance more rapidly than in the base case and it would also ensure that the debt to GDP ratio would begin to fall at an earlier date. In planning for recovery a critical additional strategic hurdle faces Irish policy makers - the need to return to the financial markets in 2013 in order to fund substantial debt repayments in 2014. If this can be satisfactorily accomplished then the position of the government will be facilitated by the prospective lower funding needs in 2015. To prepare for this return it will be important to implement fully the prospective adjustment in the public finances agreed with the Troika. If this is successfully accomplished and growth picks up in 2013 it will be clear that most of the new borrowing from 2013 onwards will be to fund debt repayments, not to pay for an unsustainable gap between public expenditure and revenue.

Note to Editors: 1. This Special Article, by John FitzGerald and Ide Kearney (ESRI), is published on the ESRI website on Tuesday 6 September at 00:01 a.m. (and will be subsequently published in hard copy in the Quarterly Economic Commentary, Autumn 2011). 2. The embargo is until 00:01 a.m. Tuesday 6 September 2011.

Link to Publication Details