Dáil Éireann Debate, Thursday - 31 March 2022
220. Deputy Pearse Doherty asked the Minister for Finance the impact that inflation in 2021 and 2022 will have on the real value of the public debt; the impact that it will have in reducing the debt to GDP ratio; and if he will make a statement on the matter. [17191/22]
View answerConsumer price inflation picked up sharply over the second half of last year and in February stood at 5.7 per cent. Almost every advanced country in the world is in a similar position, with inflation reaching a record high of 5.9 per cent in the euro area in February.
This pick-up in inflation, ceteris paribus, may reduce the ‘real’ burden of the outstanding stock of public debt in the short-term. On the other hand, the impact of rising inflation increases the risks related to the trajectory of the debt-to-income ratio and the long-term sustainability of the public finances.
Firstly, significant rates of inflation can lead to slower economic growth by increasing business and household costs and negatively impacting upon disposable income. As highlighted in the Annual Report of Public Debt in Ireland 2021, published by the Department of Finance, the debt-to-income ratio trajectory is very sensitive to the path of economic activity. As such, a slowdown in output could have a negative impact on the public debt ratio.
Secondly, given that the European Central Bank’s primary objective is to maintain price stability (2 per cent over the medium-term) and that it has signalled its intention to end the Pandemic Emergency Purchase Programme at the end of March, it is likely that the costs of borrowing will increase. The maturity structure and dominance of fixed rate instruments mean the public debt-to-income ratio trajectory is not particularly sensitive to fluctuations in the interest rate in the short-term. However, higher interest rates now will lead to increases in debt servicing costs down the line.
More broadly, while the inflationary impact of Russia’s unprovoked invasion of Ukraine could not have been anticipated, the possibility of such unexpected economic shocks speaks to the need to pursue prudent budgetary policies which provide the fiscal space for Government to respond to unforeseen events.
As the Deputy will be aware, my Department will set out updated scenarios for inflation and the debt-to-income ratio as part of comprehensive macroeconomic and fiscal forecasts in the Stability Programme Update, to be published in the coming weeks.
