The Irish Times view on the national debt: planning for the long-term
While low borrowing costs give the State flexibility, there are limits
We entered this crisis with the exchequer finances more or less in balance, which has helped in shaping the response. So, of course, has the extraordinary market interventions of the European Central Bank (ECB). Photograph: Daniel Roland/ AFP via Getty Images
Ireland’s national debt at the end of this year could be close to €240 billion, according to the latest annual report on the State’s indebtedness from the Department of Finance. As debt climbs over 100 per cent of national income – using the measure that factors out multinational distortions – it is easy to see some echoes of the last financial crisis. Yet one thing is different now. Ireland’s ability to borrow at zero or even negative interest rates gives us much more leeway this time around. The report concludes that the additional debt is manageable, even if it does create some risks in the years ahead.
We entered this crisis with the exchequer finances more or less in balance, which has helped in shaping the response. So, of course, has the extraordinary market interventions of the European Central Bank (ECB). It is remarkable to think that even though the national debt has risen sharply, the burden of servicing it continues to fall.
The new borrowings for the pandemic response do have to be refinanced in time and there is no guarantee where interest rates will be when that happens. There is an element of risk here. Longer-term trends have seen a gradual fall in interest rates and while there are no guarantees – and emergency ECB intervention will end – borrowing costs should remain low for some years. But we can’t just keep piling up debt and hoping for the best.
Much, of course, depends on the course of the pandemic. If the worst of it has passed by later this year, then the Government should be able to start reducing the deficit in 2022, albeit gradually at first as significant funds will be needed to help restart the sectors which were closed. The likely extended length of the current lockdown and the longer-term uncertainty about international travel will push up these costs.
While low borrowing costs give the State flexibility, there are limits. Ireland can’t just keep borrowing at current levels, or anything close to that. Some of the extra spending relating to the pandemic will continue in the longer term – and expenditure is also rising in areas unrelated to Covid-19. The Irish Fiscal Advisory Council has warned that it is not clear how this will be paid for. Meanwhile, more spending commitments lie ahead to meet the green agenda and to deal with an ageing population.
As Minister for Finance Paschal Donohoe said last week, if we are to move to a bigger State, we have to find a way to pay for it. Economic growth will, we hope, cover some of the bills by boosting tax revenues. But realistically it won’t pay all of them. A strategy is needed to gradually reduce the deficit and to plan the longer-term trajectory for the public finances. This will require choices to be made and part of that, inevitably, will include finding new sources of revenue.