The decision to reduce interest rates on EU borrowing, agreed by the EU Council on 21 July, means that Ireland’s public debt levels will be substantially lower than previously estimated, according to a new article from the ESRI.
In coming up with the new figures, John Fitzerald and Ide Kearney, authors of ‘Irish Government Debt And Implied Debt Dynamics: 2011 – 2015’, said they make very conservative assumptions on the interest rates available after 2013, “which could well be significantly lower than we have assumed, with consequential beneficial effects on debt sustainability”.
The article estimates that the net debt to GDP ratio will peak at between 100pc and 105pc of GDP in 2013 and that it could fall back to 98pc by 2015.
“The related gross debt to GDP ratio would peak in 2012 at between 110pc and 115pc of GDP before falling back to between 105 and 110pc of GDP by 2015.”
According to Fitzgerald and Kearney, there are no easy options in tackling the current levels of debt facing the Irish Government.
“The current programme of austerity, with an agreed package of cuts totalling €30bn over the period 2008-2014, will, on these assumptions, be sufficient to all but eliminate the primary deficit by 2013.
“However, the very high current levels of debt mean that if growth were to prove less than assumed in the Department of Finance estimates, it would not be sufficient to stabilise the debt to GDP ratio before 2015.”
A more robust recovery, meanwhile, would both improve the primary balance faster than in the base case and ensure that the debt to GDP ratio would begin to fall at an earlier date.
The article maintains that that if the Ireland can return to the financial markets in 2013 to fund substantial debt repayments in 2014, “the position of the government will be facilitated by the prospective lower funding needs in 2015”.
And it stresses the need to implement fully the prospective adjustment in the public finances agreed with the Troika to prepare for this return. “If this is successfully accomplished and growth picks up in 2013 it will be clear that most of the new borrowing from 2013 onwards will be to fund debt repayments, not to pay for an unsustainable gap between public expenditure and revenue.”