The focus of Government presently is on stabilising the General Government debt to GDP ratio and beginning the process of reducing it to a lower, safer level over time. This will be done through the implementation of further budgetary consolidation as well as policies which foster employment and economic growth. The recently published Stability Programme Update (SPU) estimates that by the end of current forecast horizon in 2015, the debt to GDP ratio will be 117.4 per cent, down from a peak of 120.3 per cent next year.
The debt correction requirement in the Inter-Governmental Treaty on Stability, Coordination and Governance
in the Economic and Monetary Union is to reduce that part of the debt ratio which is above the threshold rate of 60 per cent annually by at least one-twentieth of the difference between the actual rate and the threshold rate. It is important to remember that this requirement is already part of the revised Stability and Growth Pact. We will have to fulfill this requirement irrespective of the Stability Treaty. A transition period will apply for all countries, including Ireland, that are currently subject to the excessive deficit procedure. During this transition period, which would last for three years following the correction of the excessive deficit, the requirement under the debt correction rule is deemed to be fulfilled if we are making “sufficient progress” towards compliance.
Based on the fiscal projections set out in the recently published SPU, Ireland will be coming out of the excessive deficit procedure by the end of the current forecast horizon as a result of reducing the General Government deficit to below 3 per cent of GDP in 2015. Therefore the three year transition period referred to above will apply. This means that it will be 2019 before the debt correction requirement in the Inter-Governmental Treaty fully kicks in. As there are presently no specific macroeconomic and fiscal forecasts for the period post 2015, the exact policies that will be required, as well as the level of paydown of General Government debt that would be required to ensure compliance with the Inter-Governmental Treaty debt correction rule are conjecture at this stage.
In terms of the fiscal implications of this debt correction rule, it is important to remember that it is the debt to GDP debt ratio that is important, not the overall nominal level of General Government debt. In other words, on the basis of reasonable assumptions over the medium-term, we can expect economic growth to do much of the work in this regard.