Monday 21 August 2017

Ireland won't bounce back with fiscal bungee-jumping

With spending promises aplenty, Leo Varadkar and Simon Coveney appear oblivious to our massive debt overhang

ELECTION-SPEAK: Policy positions are rapidly being taken, with more money promised for An Garda Siochana
ELECTION-SPEAK: Policy positions are rapidly being taken, with more money promised for An Garda Siochana
Colm McCarthy

Colm McCarthy

Economic recovery these last few years, combined with very low interest costs on new government borrowing, has brought the budget deficit down sharply. But Brexit threatens the economic outlook and the European Central Bank will likely commence raising interest rates back up to normal from 2018 onwards.

Outstanding Exchequer debt remains at dangerous levels: relative to government revenue, Irish official debt is amongst the highest in the eurozone. If growth were to slow and the deficit to climb, borrowing conditions could get difficult again very quickly.

The context in which budget policy is framed, in a country without its own currency and hence with no capacity to create liquidity in a crunch, is greatly constrained by the overhang of debt. Until the budget can be brought into surplus and the overhang begins to reduce, there is a continuing exposure to less benign conditions in the international sovereign debt market.

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