Varadkar proposes easing target of reducing State debt

Ireland's long-term national debt reduction target looks set to be eased if Leo Varadkar is elected Taoiseach. Current policy is to reduce the ratio of national debt to GDP – the key measure of the debt burden – to 45 per cent in the years ahead. However, following a meeting with members of Ibec, the business lobby group, on Monday morning, Mr Varadkar said he favoured a new less onerous target of 55 per cent.

Adopting a less ambitious target for debt reduction is necessary, according to a statement from Mr Varadkar, to allow for a higher level of State funding for capital investment in future years.

Ibec and other business lobby groups had warned that the 45 per cent target would restrict room for manoeuvre in future budgets, and risk not leaving enough cash to fund vital projects.

Under EU rules the State is obliged to reduce the debt to GDP ratio to below 60 per cent over time. The ratio is estimated to have been around 76 per cent at the end of last year, down from 119 per cent at its height in 2013. However, the massive 26 per cent upward revision in the Irish GDP figure in 2015 – driven largely by multinational accounting – is seen to have artificially cut this key measure.

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Open economy

In last October's budget, Minister for Finance Michael Noonan announced that a target of 45 per cent would be adopted, which he hoped would be achieved by the mid-2020s. The move to set a more stringent target had been advocated by Central Bank governor Philip Lane in a pre-budget letter to the Minister.

In his budget speech Mr Noonan said the current EU target of 60 per cent still posed a significant risk to a small, open economy such as Ireland.

Mr Varadkar's's decision to opt for a 55 per cent figure – below the obligatory target but well above Mr Noonan's 45 per cent – shows the tricky task of finding a balance between the need to reduce the debt burden as well as to fund new investment and other State spending. He also called for more flexibility in Europe to allow for borrowing to fund investment, as opposed to day-to-day spending.

Both Mr Varadkar and his rival for Fine Gael leadership, Simon Coveney, have pledged to boost State capital investment in the years ahead as a key priority.