New interactive tool assesses impact of budget changes on debt

The Parliamentary Budget Office (PBO) has launched a new debt sustainability calculator that allows users assess the impact of budget or interest rate changes on Ireland's debt position out to 2050.

The budgetary watchdog said the interactive tool to aims to support Oireacthas members in exploring the fiscal implications of different budgetary policies in advance of next week’s budget.

Revenue

The calculator can be used to model Ireland’s exposure to uncertain GDP (gross domestic product) growth and interest rate risks.

"It is important to understand the interplay between revenue, spending, deficit, and debt," PBO director Annette Connolly said.

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“The PBO’s view is that as the economy recovers, Government should aim to close the deficit and avoid increasing the already high debt level much further,” she said.

“That said, a balance must be made between that objective and funding growth-enhancing measures and structural reforms,” she said.

The PBO’s debt sustainability analysis calculator helps to highlight these interactions by showing the outcomes of decisions at a high level,” she said.

At almost €240 billion, Ireland has the third highest debt per capita in the world, a culmination of big budget deficits in the wake of the financial crisis; the cost of bailing out the banks; and more recently the cost of pandemic-related supports.

It equates to €46,000 for every man, woman and child in the State and €103,300 for every worker.

The Irish Fiscal Advisory Council (Ifac) has stress-tested the Irish economy against possible interest rate hikes and growth shocks, finding the latter poses a greater problem. This is because much of the outstanding debt is long-dated.

Impact

The PBO’s calculator show that most of the impact from a hike in interest rates would not arise until the 2030s when most of the State’s outstanding 10-year bonds begin to mature.

“As the PBO has noted, the scope for fiscal policy in the years ahead will be much more limited than in the past,” the PBO said.

The core EU fiscal rules mandate a debt to GDP ratio below 60 per cent and public deficits below 3 per cent of GDP.

“While the fiscal rules are currently suspended, Ireland must prepare to return to being fiscally compliant in preparation for their eventual reintroduction as the Covid-19 crisis ebbs,” it said.