Debt: One-fifth of taxes will be used to pay interest
INTEREST on the national debt will be consuming at least one in every five euro raised in tax within four years – and that’s before any fresh capital is put into the ailing banks.
While the sale of some semistate companies could reduce the burden, the cost of servicing the debt is set to reach its highest level since 1993, based on the figures in the plan.
The Government’s four-year plan includes various scenarios for where debt levels will go over the next four years.
In the most optimistic scenario, the national debt peaks at 89pc of everything Ireland produces – known as the country’s Gross Domestic Product (GDP), whereas under the most pessimistic scenario the debt reaches 119pc of GDP.
That would be the highest level of debt for Ireland in 20 years. A “baseline'' strategy even puts the debt at the highest level in 20 years.
Finance Minister Brian Lenihan admitted the debt levels did not take account of any additional funds provided for the banks, following talks with the EU and the IMF.
When pressed on this, Mr Lenihan said a better picture of the debt position of Ireland would emerge once these talks were concluded.
The baseline scenario is based on an average interest rate of 3.4pc, which is far lower than the current interest rates Ireland is having to borrow at.
Clearly the interest rate agreed with the EU/IMF will be pivotal in meeting the debt forecasts laid out in the plan.
The figures also exclude any debt that may arise from NAMA.
The outcome for Ireland's debt position relies heavily on whether the NTMA decides to run down its cash balances which stood at €20bn at the start of the year.
For example, if the cash balances are offset against the debt, the debt to GDP peaks at 100pc, rather than 102pc next year.
The sustainability of debt for countries rests on whether their effective interest rate is higher than the growth rate or not. If the interest rate is higher than the annual growth rate, a budget surplus is needed to stabilise the situation.
But Ireland will not have an underlying budget surplus until 2014, according to the forecast. Delay
Lower growth or higher interest rates would delay stabilising the debt position.
The recent upward movement in Irish bond yields suggest the market is already very worried about the debt position, even before the latest attempt to close the budget gap.
An IMF/EU package worth €85bn would add considerably to the burden, although much of this borrowing would have to be done in any case.
Of this sum up to €30bn could be capital (possibly contingent in nature) for the banks. It is not yet clear how such capital will be treated by the European authorities.
If it is added directly to the national debt it would hugely alter forecasts in the four-year plan.