The Government will save £80 million on debt repayments next year, rising to £250 million by 2002 as lower interest rates come into effect following our entry to the single currency.
By the year 2010, according to National Treasury Management Agency director, Mr Paul Sullivan, this should amount to about £500 million a year or about a £400 saving for every working person in the State.
The Minister for Finance, Mr McCreevy, said yesterday this money would be spent on social inclusion measures and taxation cuts as well as paying off the national debt.
The £80 million expected to be saved next year is not yet included in budgetary arithmetic and is likely to be directed towards improving the position of low income families.
The latest calculations are based on the assumption that euro interest rates will follow the lead of lower German rates into the next century. And according to Mr Michael Somers, chief executive of the NTMA, this is realistic because the Germans are very good at keeping interest rates low.
In contrast, Mr McCreevy insisted that this year's Exchequer surplus would be used only to pay off the national debt. "The entire surplus will automatically go to paying off the debt," he said. "It cannot be used for increases in public sector pay." The Department of Finance has forecast a £700 million surplus but many forecasters believe it could be as high as £1 billion.
This will be the first time the Government has cut the actual level of debt through repayment rather than relying on favourable currency movements.
Speaking at the publication of the NTMA's annual report yesterday, Mr McCreevy emphasised the importance of actually reducing the debt which would mean the £500 million annual savings, forecast by the NTMA, would be even greater. He insisted this could be spent on social inclusion and taxation measures.
However, there is still some way to go in clearing the debt. Measured on an EU-basis it was still £32.3 billion at the end of 1997, accounting for around £2 billion in interest repayments every year. Nevertheless, the debt as a proportion of gross domestic product, a measure closely watched by financial markets, has been dropping sharply. Last year it fell eight percentage points to 63 per cent and is expected to fall to 56 per cent this year. Overall our indebtedness is only 88 per cent of the EU average and by the end of this year only three member states are expected to have a lower ratio.
But one future problem is that from January 1st the Irish bond market will only be 1 per cent of a much larger market and financial institutions here will no longer be constrained to investing here. "A large number of them have indicated they will move elsewhere and so we will have to find new borrowers," he said. "The challenge will be to attract significant investors but still keep the spread of difference between Irish and German rates as low as possible." The holdings of international investors have already declined from 33 per cent of the total market to about 24 per cent of all outstanding bonds.
Mr Somers also pointed to the success in winning upgrades from credit rating agencies Standard and Poor's as well as Moody's. He added that the agency has also been making inroads in getting into as many international indices as possible, which means international fund managers are obliged to buy even a small amount of Irish denominated debt to mirror the index.
Overall it was a successful year for the NTMA and it made £31 million relative to the internationally-set benchmark in 1997. Debt service costs were also £34 million below the 1997 Budget.
