Fiscal Sustainability When Time Is On Your Side

A not unreasonable base case scenario, outlined in detail in section 2, suggests that demographic developments are unlikely to threaten fiscal sustainability in Ireland in the years ahead. Indeed, the debt ratio, the conventional indicator of fiscal sustainability, is forecast to decline to a zero level by about 2020 and to be still at a very low level by 2050. It is argued in the paper that favourable macroeconomic and fiscal prospects provide, in many ways, no less difficult challenges for public finance management than dealing with poor baseline prospects. In section 3, two long-term policy options with direct impact on the public finances are discussed. The first option - reducing the debt - raises the important issues for government and has implications for the financial and monetary system that need careful consideration. The second option - prefunding future pension liabilities - also raises important issues, not least that member states face a disincentive under EU fiscal rules to initiating prefunding schemes. In section 4, the dynamics of fiscal sustainability in a fast-growing economy such as Ireland are considered. It is argued that the EU fiscal rules may unnecessarily restrict government investment and may consequently have a negative impact on long-term macroeconomic and fiscal prospects. Section 5 concludes.