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Fiscal Policy

Dáil Éireann Debate, Tuesday - 3 May 2011

Tuesday, 3 May 2011

Ceisteanna (7)

Michael McGrath


30 Deputy Michael McGrath asked the Minister for Finance in view of his previous comments that Ireland’s debt position could become unsustainable and in view of all the economic data currently available to him, if he believes Ireland’s debt position is sustainable going forward; the growth forecasts for the next number of years on which he is basing his view; and if the National Treasury Management Agency has advised him on the matter of Ireland’s debt sustainability. [9750/11]

Amharc ar fhreagra

Freagraí ó Béal (7 píosaí cainte) (Ceist ar Minister for Finance)

The State's debt burden has increased substantially over the last number of years as a result of the significant deterioration in our public finances, owing to the economic downturn and the significant level of State support provided to the banking sector. A gross general Government debt level of €148 billion or 96% of GDP, as it is estimated to have been at the end of 2010, is very high and requires our ongoing, close attention.

Both the nominal level of the debt and the debt to GDP ratio are forecast to increase further in the coming years, albeit at reducing levels as we will have to continue to borrow to fill the gap between revenue and spending. In addition, economic growth remains relatively subdued. The stability programme update, laid before the House and submitted to the European Commission last Friday, forecasts that the debt to GDP ratio will peak at 118% in 2013 before declining in the following two years to 111% by 2015. These forecasts are based on my Department's macroeconomic and fiscal forecasts and the advice of the National Treasury Management Agency regarding the debt. The stability programme update also forecasts GDP growth of 0.75% in 2011, rising to 2.5% in 2012. For the period 2013 to 2015, GDP is expected to grow by 3% per annum on average.

The trajectory for the debt ratio depends on the relationship between economic growth, the interest rates applying to the Government debt and the level of budgetary adjustment implemented by Government. However, there is no one rule that says that if one's debt is above a particular level, it is unmanageable. A key determinant in the stabilisation of the debt ratio will be the narrowing of the gap that currently exists between revenues and expenditure through further fiscal consolidation. Coupled with the implementation of policy measures that will assist in boosting economic growth, a primary surplus is forecast to emerge, that is, an excess of revenues over expenditure excluding interest expenditure. This is scheduled to happen by 2014.

A further measure which may be referenced in forming a judgment on whether a particular level of debt is sustainable is the proportion of tax revenues that must go towards servicing the debt. Based on the stability programme update projections, it is estimated that around 15% of tax revenues will be required to service the interest on the State's national debt this year. By 2015 almost 21% of our total tax revenues will be required for that purpose. This is undoubtedly a very significant level, but it is worth bearing in mind that it is well below the ratios experienced in the mid-1980s when around one third of the tax revenues generated in the State went towards servicing the interest on the national debt.

As the NTMA is the agency tasked with the management of the State's borrowing needs, I and my officials have naturally been in close contact with them regarding our debt position. The NTMA is in constant contact with market participants and their view on the market perception regarding sovereign Irish debt is a crucial input into our deliberations as it is the markets' assessment of our position which will ultimately determine the rate at which we can borrow. The agency's view is the same as ours at present, namely, that Ireland's debt position is very large and has grown rapidly in recent years but if we continue to pursue the right policies, it is sustainable. However, debt sustainability is not a black and white issue and we must do everything in our power to ensure that as much as possible the balance of the arguments reinforces this assessment. This underlines the reason we must continue to deliver on our commitment to fiscal consolidation, pursue policies that underpin growth and seek to achieve measures that alleviate the cost of our debt burden.

The stability programme update published last Friday made for sobering reading, particularly with the reduction in the growth forecast for the current year down by a full per cent to 0.8%. We all accept that growth is the key issue regarding debt sustainability but my question is whether the Department of Finance is still being overly optimistic. While it has reduced significantly the forecast for 2011, it predicts GDP growth of 2.5% for 2012, which is higher than any of the other bodies, including the domestic bodies, the ESRI and the Central Bank. The IMF and the European Commission indicate it will be 1.9% next year; we are basing our figures on 2.5%. For the following three years, 2013, 2014 and 2015, we are factoring in growth of 3% which we all hope we achieve and even out-perform but even on the figures we have factored in, as the Minister has acknowledged, the debt to GDP ratio will be 118% in 2013.

I will ask the Minister to reply to that and we will come back to the Deputy.

In regard to the NTMA's advice that if there were to be any deterioration on the figures beyond what we currently anticipate, are we——

The Deputy is correct that the level of growth in the economy is a very important component of whether the debt continues to be manageable but equally important is the size of the debt and the interest rate charged on the debt. It is a combination of three inputs.

On the growth rates projected in the stability programme update put before the Houses of the Oireachtas last Friday, the Deputy will have to remember that it is on the estimate of his Government's budget that the adjustments have been made. The previous figures were those brought before the House by my predecessor in January when the budget was introduced. A number of things have happened since. First, at that stage only €10 billion was pencilled in arising from the stress tests and that has now gone up to €24 billion. As well as that, events in North Africa have pushed up the price of oil, and interest rates internationally are tending upwards. Various factors are now coming through, therefore.

It is true to say that the Department of Finance is slightly ahead of the projections of the European Commission and the IMF but the IMF took a €35 billion injection into recapitalisation of the banks and the EU Commission took a €25 billion investment into the recapitalisation of the banks when they were working out their figures. I said previously when launching the initiative on the banks, and much to the amusement of some of our learned people in the media, that growth is not a static figure. Sometimes people talk about growth as if it was fixed and that nothing could be done about it. Obviously, Government policies influence growth as well and I suggest to the Deputy that the policies we are pursuing now will have an influence on growth going forward.

As the Minister has indicated, the projection is that by 2015 the national debt interest repayments will account for 21% of tax revenue but that tax revenue figure is based on a figure which is 27% higher than the 2011 tax revenues. If that transpires to be more optimistic than the reality, the amount of the tax revenue going in interest repayments will far exceed 21%; it could be 25% or even more. While we have to plan on the basis of the figures the Department has produced, based on experience and track record we must also prepare for a less optimistic scenario. Has the NTMA advised on that?

The Deputy is correct. All these matters are estimates and projections, and they are the best possible estimate based on the facts, but things are changing rapidly. Things are changing rapidly internationally and therefore it is not possible to predict; but to get back to the Deputy's original question on sustainability, I believe our position is now sustainable. Some people make false comparisons with Greece. The figures the Deputy has quoted seeing the debt peaking out in 2013 at 118%. The equivalent figure for Greece is157%, and that is before its more recent crisis, and it is tending upwards all the time. We are not in the same category as Greece. We are not in the same category as Portugal, and people who talk about sustainability should remember that we are going into surplus on the balance of payments and any country that has a balance of payments surplus is not insolvent when the whole figure is taken together.

We are giving the Deputy the best figures available. We will continue to give him the fullest possible information but we will also point out to him the assumptions on which they are based and as the assumptions vary, things change. For example, the fiscal figures for April, which were published yesterday evening or today, would show that the tax profile is beyond the Deputy's budget estimate for December and expenditure is below the budget estimate for expenditure. Therefore, for the first four months of the year things are better than on track and we hope that continues for the rest of the year but it does vary and we will not have any degree of certainty until we get the June figures. It will be early July, therefore, before I would be firm on figures but so far so good.