In last week's budget I announced that the Government has decided to set a new domestic target debt to GDP ratio of 45 per cent to be reached by the mid-2020s or thereafter depending on economic growth. This will allow future Governments to not only apply the rainy day fund but, in the event of future shocks, the capacity to borrow to mitigate the impact of such shocks on the lives of our people. This target goes beyond the requirements of the Stability and Growth Pact, and reflects the fact that as a small and very open economy, a shock in any part of the world affects us. The rationale for this target is:
1. That GDP measures can be quite volatile in Ireland as indicated by the 26% growth rate for 2015 and
2. The need to build up a safety buffer to ensure continuing market access.
The growth outlook underlying this target is as set out up to 2021 in the Fiscal and Economic Outlook published with the Budget last week, and after that an assumed average nominal GDP growth rate of 4.5% out to 2026, made up of real growth of 2.5% and a price increase of 2%. The debt projections make the technical assumption that the 2021 primary balance of 2.6% of GDP is maintained thereafter, with the average implicit interest rate held constant at it 2021 value. This projected timing does not factor in proceeds from the sale of banking assets, which will be used to lower debt.
In order to achieve this target, it is critical that we reach our Medium Term Budgetary Objective or MTO defined as a balanced budget in structural terms - in 2018 - and maintain it thereafter and that is what the Government intends to do.