Report warns of explosion in public debt caused by ageing population

Longer working lives, minimising increases in public spending and reforms to boost productivity will be necessary over the coming years if an explosion in public debt, caused by an ageing population, is to be avoided, a new report from the Department of Finance has found.

The report, released by the department on Sunday, projects huge increases in age-related costs unless significant policy changes are made by future governments.

Rising life expectancy, greater numbers of older people and a consequent fall in the rate of economic growth will mean that total age-related expenditure will increase significantly as a proportion of government spending – squeezing budgets elsewhere and increasing deficits.

The report finds that Ireland’s relatively generous provision for older people will mean that total age-related expenditure in Ireland will pass the EU average over the next 15 years, piling pressure on the public finances.

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Projections compiled by the department mean “age-related increases in public expenditure and a slower pace of revenue growth lead to the emergence of a significant deficit by the end of the next decade, reaching around 3 per cent of GNI (Gross National Income) (2 per cent of GDP)”.

“The deficit would continue to increase sharply thereafter, peaking at over 8 per cent of GNI (5 per cent of GDP) in the mid-part of this century,” the report finds.

Future governments

Left unchallenged this would lead to a rocketing of Ireland’s national debt. As this would lead to unsustainable pressure on the public finances, significant policy responses will become inevitable for future governments.

While some changes such as the raising of the retirement ages and the gradual reforms of the generous system of public sector pensions have already been introduced, the report sets out in general terms what other reforms may be necessary in the future.

It suggests the employment rate of older people could be increased by extending workforce participation amongst women of working age, and also by linking retirement age to life expectancy.

It also finds that the expected slowing rate of economic growth “could, in part, be reversed by implementing structural reforms that boost productivity”.

It also said that the public finances could be bolstered by balancing the budget, restraining expenditure increases and using windfall gains – including the proceeds of the sale of State-owned bank shares – to reduce public debt.

Additional pressure

Commenting on the report, Minister for Finance Paschal Donohoe said: "The analysis published today by my department clearly illustrates the additional pressure that the impending shift in the demographic profile of the population could place on the public finances. In addition to the associated expenditure pressures, a reduced economic growth rate would pose additional challenges for the public finances of the State.

“A range of policy reforms, such as increases in the State pension age, have already been implemented to mitigate against the costs associated with population ageing. However, additional measures including fiscal restraint in non-age-related expenditure, such as our debt-servicing costs, will be necessary to safeguard the sustainability of the public finances,” he said.