National priority should still be paying off our debt as quickly as possible
Opinion: Interest costs are an enormous drain on our limited resources
We are currently spending the price of 17 children’s hospitals annually on paying interest on our debt. Photograph: Bryan O’Brien
It’s surprising how little attention is given to the need to pay down Ireland’s national debt. Possibly that’s because we think it’s really our children’s problem.
Ireland’s official government debt was about €190 billion at the end of 2012. If the Government achieves its target of a 3 per cent deficit in 2015, the debt at the end of that year will be about €210 billion, excluding the huge bank debts and pension debts.
If Ireland manages in the next couple of years to get its annual tax income to match its non-interest expenditure (ie to achieve a nil “primary budget” deficit), and to keep it that way, even then our total debts will rise by about €10 billion per annum forever (assuming a blended interest rate of 4.5 per cent on the official debt, and not counting interest on bank and pension debts).
Assuming Ireland will never default on its debt (to institutional lenders or to local pensioners), Irish citizens are going to have to pay it. We surely have to start getting used to that idea, and begin talking about how we will do it and when. We need to recognise that by beginning to reduce the State’s debts we will start to make real savings for the benefit of our society.
A one-off debt reduction of €3 billion would cut the State’s annual interest costs by more than €100 million forever. If Ireland ran a budget surplus of €3 billion per annum every year, then – with the effect of compounding – the State’s debts would be reduced by €38 billion after 10 years and our annual interest costs would be €1,700 million lower.
The interest costs are the real killer. We are currently pouring 20 per cent of tax revenues – €8,500 million per annum – down the drain in interest costs, enough for 17 new children’s hospitals. Put another way, an average full-time worker pays €450 a month in taxes to pay interest on debt.
Yet there has been almost no discussion of how, or even whether, to reduce the State’s debts (other than the perennial prayer for debt forgiveness). There is debate, of course, about how to slow the rate of increase to the 3 per cent level targeted for 2015. But nobody seems interested in getting beyond that level. And it’s not clear that Ireland would have chosen even to aim for that level if it had not been required by its troika of rescue lenders.
Just as for a company, it’s essential that a state generates enough surplus to service its debts. If it wants to borrow, it needs to be able to pay back. And if it starts to look like it can’t, it needs to get on top of the problem.