Summary
Irish Government Debt and Implied Debt Dynamics: 2011-2015
By John FitzGerald and Ide Kearney
Our analysis assumes a successful resolution of the current Euro area crisis over the coming months.
Using medium-term official forecasts on the growth rate and assuming that the official target
primary surplus (government surplus excluding debt interest payments) will be achieved, we
examine the likely path of the debt out to 2015. We take account of the reduction in interest rates
on EU borrowing agreed at the EU Council meeting on 21st July. However, we make 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 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 without additional fiscal action. 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. Thus the key to the long-term sustainability
of the Irish debt will be a return to sustainable medium-term growth.
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 to provide
confidence to Irish citizens and to the wider financial community that Ireland is on a sustainable
growth path. If this is successfully accomplished and if 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. This will greatly ease the task of
funding the high, but falling, debt burden in the medium term.
Finally, in the context of an economic recovery, the eventual sale by the state of its stake in the pillar
banks could see a substantial once off reduction in the long-term debt burden.