Use economic growth to reduce national debt, EU advises

The Government should use the current period of strong economic growth to reduce the national debt as quickly as possible, the EU Commission has said, following a visit by senior officials to Ireland. The Commission also said that while Irish bank profitability was increasing, the percentage of non-performing loans on their books remained among the highest in the EU. Along with rising long-term mortgage arrears this was limiting the ability of banks to share in economic expansion, the Commission says.

In a statement issued following the visit, the Commission noted that the Government had announced just before the Budget that it was increasing spending by around 0.7 per cent of GDP this year, which would carry forward to next year, on the basis of higher-than-expected revenue. Minister for Finance, Michael Noonan has said that he believes these revenues, largely coming from corporation tax, are sustainable. However the EU Commission says that “ the factors underlying the very buoyant and generally volatile corporate tax receipts still need to be ascertained.”

The statement notes that the deficit target for next year would have been significantly lower if higher revenues had been applied to cutting borrowing. It also notes that State capital investment remains low and that the Government’s capital investment plan would stabilise this spending at well below the euro area average. However the Commission does not give a verdict of its view on the 2016 Budget package, saying it is undertaking a “ full assessment” with reference to EU fiscal rules and will present its opinion shortly.

Fiscal stance

While the Commission’s stance in relation to the fiscal rules remains unclear, the tone of its statement, issued after a Troika post-bailout visit, indicates that it would have preferred a bigger cut in borrowing and remains concerned about the State’s investment plans and the need to tackle housing and other infrastructure bottlenecks.

In relation to banks, the Commission says that non-performing loans have fallen to 19.8 per cent of the total in 2015, from over 25 per cent in 2013. However this it still high by EU standards and is limiting the banks’ ability to lend. Banks new lending to the private sector, especially SME’s, remains subdued, it says, though there have been some signs of a pick up. Banks need to continue with loan restructuring, it says and the legal process needs to move more quickly to help this to happen.