Friday 9 December 2016

Public sector pay deals will lead to fresh fiscal disaster

The standard and top rate of income tax would have to be substantially increased to pay for public sector pay awards

Published 06/11/2016 | 02:30

Trouble ahead: Finance Minister Michael Noonan and Minister for Public Expenditure and Reform Paschal Donohoe pictured after delivering Budget 2017 last month Photo: Niall Carson/PA
Trouble ahead: Finance Minister Michael Noonan and Minister for Public Expenditure and Reform Paschal Donohoe pictured after delivering Budget 2017 last month Photo: Niall Carson/PA

Ireland's economic management is caught in a trap, exposed to a fiscal paradox that is barely visible. Despite heavy debt, the Government can borrow freely at low interest rates - lower than they were when the public finances were far healthier - courtesy of the easy money policy pursued by central banks.

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In normal circumstances a heavily indebted country would face much higher interest costs on reborrowing, as it must do every year as old debts mature and fall due for repayment, and on fresh borrowing. But the European Central Bank (ECB) has been buying government bonds at a spanking pace, keeping interest rates artificially low.

Cheap borrowing costs have flattered the Irish Budget numbers for each of the past four years. This will end, possibly as early as 2017, when things get back to normal - the declared aim of the ECB's policy.

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