The latest report from the Department of Finance on the national debt highlights the big jump in indebtedness during the pandemic. The national debt at the end of last year is estimated at ¤226 billion and while comparisons between countries are not straightforward, Irish debt is towards the upper end of the international average.
For now, the debt is not a problem. In recent years, and particularly during Covid-19, additional borrowings were taken on at rock-bottom interest rates. As a result, the average interest rate on the outstanding borrowings has continued to fall. Approximately two-thirds of the debt is at rates of less than 2 per cent, according to the report, which was published recently..
As the vast bulk of debt is locked in at fixed interest rates, this offers some significant protection in the short term. And as the exchequer is now in surplus, additional borrowings are only needed to refinance old debt, meaning that for now the State is not particularly exposed to higher interest rates.
However, the relatively large size of the debt is important for two reasons. First, it creates an exposure if conditions change. The department scopes out a range of scenarios, the most damaging of which would be the coincidence of a hit to economic growth and a big fall-off in corporation tax receipts. The establishment of the National Reserve Fund, into which an additional €4 billion has just been paid, offers an additional and welcome buffer if trouble hits.
The second, and related, reason why the debt is important is that it does constrain options in the future. The high debt level will have to be refinanced at higher interest rates. Meanwhile, Ireland will need significant funds in the years ahead as the population ages and the cost of the major green transition has to be paid. Higher taxes will, at some stage, be needed.
The era of cheap money is over and the constraints on national finances are reappearing. For countries with relatively high debt levels, like Ireland, this needs to be faced up to in the context of planning the national finances.