Donohoe warns State’s high debt level leaves it exposed to rising interest rates

Minister says measures to tackle budget deficit will be needed once pandemic abates

Paschal Donohoe: “The higher the stock of public debt which you are carrying, the more painful any increase in borrowing costs will be.” Photograph: Julian Behal

Paschal Donohoe: “The higher the stock of public debt which you are carrying, the more painful any increase in borrowing costs will be.” Photograph: Julian Behal

 

Minister for Finance Paschal Donohoe has warned that the State’s large national debt leaves it exposed to a future upturn in interest rates, and that the budget deficit – currently at €14 billion – would have to be brought down once the current crisis abates.

However, he declined to indicate if that meant tax increases. He also said the Government would not move to withdraw Covid-related supports too soon as it would damage the prospect of recovery.

“To withdraw them too soon would be damaging to our national finances due to the likely harm caused to jobs and income,” Mr Donohoe said in an address to the Economic and Social Research Institute (ESRI), marking the first-year anniversary of the pandemic.

The State’s national debt is set to rise from just over €200 billion before the pandemic to €239 billion by this end of this year as a result of additional borrowing to facilitate emergency spending on Covid-related supports.

While the interest bill on this debt remains extremely low, Mr Donohoe said this would not always be the case, and that there were already signs of a pick-up in inflation and inflation expectations in several countries.

Higher rates of inflation tend to be accompanied by highest interest rates.

“The higher the stock of public debt which you are carrying, the more painful any increase in borrowing costs will be,” Mr Donohoe said. “Keeping the interest bill down will depend on reducing the deficit.”

Deficit

The Department of Finance is forecasting a budget deficit of about €20.5 billion for 2021. It was put at €14 billion on a 12-month rolling basis in February.

The Government’s management of the public finances in recent years has been greatly aided by historically low interest rates.

In his speech, Mr Donohoe noted that last year’s interest bill on outstanding debt absorbed 4.5 per cent of total tax revenue; in 2013, it absorbed 12.5 per cent per cent of total revenue.

“This phenomenon is repeated across other advanced economies, including in the euro area, UK and US,” he said.

“Maintaining the public finances – and the interest bill in particular – on a sustainable path is particularly important within a monetary union where monetary policy is not always optimal for a small country.

“So while the policy framework with respect to deficits and debt is evolving, this does not absolve us of the need to reduce our deficit over time,” said Mr Donohoe.