Ireland's debt and deficit - taking stock

By Eoin Fahy, Friday, 13th December 2013 | 0 comments

As Ireland exits its three year troika bailout period, it is a good time to ‘take stock’ of the deficit and debt situation for the country. How big is our debt relative to history and to other countries? How much work needs to be done to get the budget to balance again? Do recent good economic data (rising employment, falling unemployment, etc) make a big difference to our fiscal situation?

Let’s start by looking at the national debt. The bad news is that of course it is at a very high level, about 124% of GDP. That’s about €45,000 of debt for every man, woman and child in the country. By way of international comparison, as the chart below shows, it’s the fourth highest in the EU, after Greece (170%), Portugal (132%) and Italy (134%). debt to gdp

The good news (though it that much to shout about) is that this year should mark the peak, and on reasonable economic forecasts the debt should be down to about 114% by the end of 2016, as this chart shows (using Department of Finance projections).

debt to gdp over time

Next, let’s look at the deficit, the gap between what the government takes in and what it spends. This year that deficit will be about 7% of GDP, or €11.5bn. That compares to a peak – excluding the money needed for bank rescues – of 11.4% in 2009. Ultimately the budget needs to balance, of course, but first the deficit needs to at least fall to 3% of GDP as that is the highest level accepted by the EU under its fiscal rules.

defict as pct gdp

So the bad news is that – at first glance - we are only about half way from the worst point (11.4%) to where we need to be (3% at max). But that perhaps understates the extent of progress, as the economy has now begun to grow. And it is economic growth, above anything, that will get the deficit down. We expect that that growth, combined with some relatively modest spending cuts and tax increases in the 2015 Budget, will drive the deficit down to below 5% next year, and to below 3% in 2015.  In fact the graphic below (from the NTMA) shows that the vast bulk of budgetary consolidation (or austerity measures, if you prefer) is already complete.  To be exact, of the 20% of GDP of budget measures that are due to be done between 2008 and 2015, 18.9% has already been done.austerity so far

So a stock-take of Ireland’s fiscal situation shows a mixed picture. The deficit has already come down substantially and the pace of decline will accelerate from here. That is vitally important as once the deficit is eliminated, or reduced to an acceptably low level, austerity measures will no longer be required.

But on the other hand the outstanding stock of national debt that has built up as a result of the huge deficits of the last few years, and the need to rescue the banks, remains very high and will only begin to decline slowly from next year. Ireland will need to continue to run very cautious fiscal policies for as long as that stock of debt – and the interest burden on it –remains at high levels.Austerity measures may be coming to an end - but Ireland is a very long way from being in a position to begin to substantially increase public spending or cut taxes.

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