The Department of Finance has warned the Government that continuing to run a budget deficit despite strong economic growth "increases the vulnerability of the public finances to an economic shock."
In an annual report on Ireland’s €200 billion national debt, published on Monday, the Department warns that public debt here per head of population, at €42,000, is third highest among the world’s advanced economies and that €1 out of every €13 spent by the Government this year will go on servicing it.
Surpluses
The report points out that 13 of the 28 EU member states now run budget surpluses, including most of the other small, trade dependent European economies with low unemployment rates, such as Denmark, the Netherlands, Sweden and the Czech Republic. In contrast, Ireland plans to run a deficit of 0.3 per cent of GDP this year and the plan is to borrow again next year, with the national finances only due to go into surplus in 2020.
Ahead of the October budget, in which the Government will outline its final financial plans for next year, the report warns that “ while the deficit is small, it begs the question as to what would happen the headline deficit if the economy was subject to an economic shock, which is particularly relevant at the current juncture, given heightened economic uncertainty.”
The report, according to a note, “ was produced by the economic division of the Department of Finance and does not necessarily reflect the views of the Minister of Finance or the Irish Government.”
Cycle
Welcoming the report, Minister for Finance Paschal Donohoe said in a statement that "the Government's objective as set out in the summer economic statement is to balance the budget over the economic cycle and to use windfall receipts for debt reduction". The minister has also committed to putting cash aside in a new rainy day fund.
The report says that reducing public indebtedness “ remains an important challenge.” It analyses Ireland’s debt burden in recent years used the ratio of debt to gross national income (GNI*), the latter being the new indicator developed by the CSO to try to filter out the distorting impact of multinational activity. This shows the ratio of debt to GNI* peaking at just under 170 per cent in 2012, at the peak of the crisis. Since then, strong economic growth and lower borrowing has reduced the ratio to around 111 per cent by the end of 2017.
The report points out that the ratio has fallen in recent years largely because the economy has been growing so rapidly, meaning any economic shock “ would expose the high level of public indebtedness.” An economic shock could leave the ratio stuck at over 100 per cent up to 2025, according to the analysis, compared to a more benign scenario which would see it drop towards 80 per cent.
While strong growth has been reducing the burden of debt, the actual cash level of debt is expected to increase from €201.3 billion this year to €209.4 billion next year.
