Ireland has had a lot of experience of public debt crises. But right now, our main problem is poor management of the exchequer’s abundant, though vulnerable, resources. This compares with other major economies, where the scale and growth of public debt looms large and is a major challenge for governments.
In the UK, France and the US, government debt exceeds 100 per cent of national income. The sustainability of their public finances is posing major political challenges.
We will see this month how the UK government proposes to square the circle of political ambition and fiscal prudence. In France, the absence of a government majority in parliament may prevent any resolution, at least until after next year’s presidential election. As for the US, thus far it is ignoring the problem, as its fiscal situation deteriorates.
We know from Ireland’s debt crises in the 1980s, and again from 2008 to 2013, that once the debt burden exceeds 100 per cent of national income, there can be no resolution without serious pain.
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By 1987, our debt interest payments were absorbing 10 per cent of national income, and 20 per cent of all government expenditure. The rapid growth in these outlays over the 1980s squeezed resources for government services, and also necessitated extremely high taxes. Together that made a recipe for national misery.
Reversing the rise in indebtedness proved very painful, and took most of that decade.
Although Ireland’s national debt in the wake of the 2008 financial crash peaked at more than 160 per cent of national income, higher than in the 1980s, the burden of debt proved much more manageable.
This was due to the assistance of the bailout, and a much lower external interest rate environment in its aftermath. While the necessary austerity was very painful, it only lasted four years, not a decade. Debt interest payments peaked in 2012 at less than 6 per cent of national income, and nearly 10 per cent of government expenditure.
With a rapid economic recovery, and low interest rates internationally, our indebtedness fell dramatically. Today, government interest payments account for only 2 per cent of Ireland’s national income, and almost half of that cost is covered by interest income from the Government’s investments.
Ripping the plaster off slowly in the 1980s was more painful. A lesson from the Irish experience over both debt crises is that the faster action is taken, the less damage there will be to the economy and society. The EU and IMF, which lent us large sums, also pressed for faster action in the more recent debt crisis.
Right now, the external environment has turned nasty for governments needing to borrow. Interest rates have been driven up by the huge scale of financing needed by governments, especially the US, alongside giant borrowings to fund the AI investment splurge, and by rising inflation linked to oil and gas.
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Interest rates could well climb further if major economies cannot bring their public finances under control and if the energy crisis is not resolved.
However, interest rates in Ireland, Portugal, Spain and Greece have risen more modestly over the last three years than in countries with major fiscal problems such as France and the UK. We the “PIIGS” [Portugal, Italy, Ireland, Greece and Spain] dealt with our debt problems a decade ago. Today, Ireland can borrow at rates very close to those of Germany, reflecting a very similar levels of indebtedness.
The US is particularly exposed, because much more of their debt is short-term, unlike most European countries, which will only need to refinance 20-30 per cent of their national debt in the coming five years
Between now and 2030, we will have to refinance 30 per cent of our national debt at today’s higher interest rates. While this will mean some rise in interest payments, the change won’t be very significant. Moreover, some of the extra cost should be offset by a higher return on government financial investments.
For the UK (whose interest bill is already 3.4 per cent of national income) and for the US (paying interest amounting to 4.8 per cent of national income), the cost of refinancing at today’s higher interest rates will add to their budgetary problems.
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The US is particularly exposed, because much more of their debt is short-term, unlike most European countries, which will only need to refinance 20-30 per cent of their national debt in the coming five years. The high interest rates needed to dampen US inflation will hit their public finances hard.
The US president has floated a $5,000 cash inducement for all if the Republicans win the midterms. Meanwhile, in the real world, higher debt payments will squeeze resources in the UK and France for social services, health and defence, unless taxes are raised.
If public debt continues to climb, interest rates will again ratchet up. That will slow down growth in the private sector, limiting any growth dividend to spend on public services, and stifle the housing market.
Ireland’s Minister for Finance has it far luckier than his international peers.
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