Government Debt - We're not out of the woods yet

Posted on October 19, 2015 by Tom McDonnell

Out of the woods
We're not out of the woods

Changes in government debt over time reflect the impact of government deficits. The sustainability of the national debt depends on the scale of the debt in relation to the size of the economy.

The government debt-to-GDP ratio is the amount of a country’s total gross government debt as a percentage of its GDP and is one of the indicators contained within the NERI’s Quarterly Economic Facts (indicator 6.4). A rule contained in the 2012 EU Fiscal Compact stipulates that where the gross general government debt-to-GDP ratio exceeds 60% countries must reduce it by 1/20 of the excess per annum. In 2014 the Republic of Ireland was one of 16 EU member states above the 60% threshold. In a growing economy the debt to GDP ratio will tend to fall even if we run modest deficits and it is unlikely the 1/20th rule will be a particularly onerous constraint in the short-to-medium term.

The general government deficit was €7.5 billion or 4 per cent of GDP in 2014. Gross debt was €204.4 billion or 102% of annualised GDP at the end of June 2015. Net debt was €166.6 billion or 83.1% of annualised GDP. We expect the Budget deficit to decline gradually over the next few years. The reductions in the numbers unemployed will lead to reduced expenditure on income supports while more people employed and rising disposable incomes will generate additional direct and indirect revenue flows. In the Autumn Quarterly Economic Observer we estimated that the budget deficit in 2015 would be close to 1.7% of GDP. The supplementary expenditure estimates have changed the picture somewhat and a deficit marginally in excess of 2% (€4.3 billion) is now anticipated.

We now project that the gross debt to GDP ratio will remain in excess of 90% of GDP until 2018. This is still a high level and the Republic remains vulnerable to an adverse interest rate shock.

The public finances are not yet out of the woods and we would be wise not to stoke up expectations too much.

Posted in: Macroeconomics

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