Finance Minister Paschal Donohoe warned that the state’s large national debt leaves it exposed to a future hike in interest rates and that the budget deficit – currently € 14 billion – is expected to be reduced once the current crisis subsided.
However, he declined to say whether that meant tax increases. He also said the government would not withdraw Covid-related support too soon as it would hurt the prospects for recovery.
“To withdraw them too soon would be detrimental to our national finances because of the likely damage to jobs and incomes,” Donohoe said in a speech at the Institute for Economic and Social Research (ESRI), marking the first anniversary of the pandemic.
The state’s national debt is expected to rise from just over 200 billion euros before the pandemic to 239 billion euros by the end of the year thanks to additional borrowing to facilitate emergency spending on support linked to Covid.
While the interest bill on this debt remains extremely low, Mr Donohoe said this would not always be the case and there were already signs of accelerating inflation and inflation expectations in many countries.
Higher inflation rates tend to be accompanied by higher interest rates.
“The higher the stock of public debt you carry, the more painful any increase in borrowing costs will be,” Donohoe said. “Reducing the interest bill will depend on reducing the deficit.”
The Ministry of Finance forecasts a budget deficit of around 20.5 billion euros for 2021. It was estimated at 14 billion euros over 12 rolling months in February.
The government’s management of public finances in recent years has been greatly facilitated by historically low interest rates.
In his speech, Donohoe noted that last year’s interest bill on outstanding debt absorbed 4.5 percent of total tax revenue; in 2013, it absorbed 12.5% of total revenue.
“This phenomenon is repeated in other advanced economies, notably in the euro area, the United Kingdom and the United States,” he said.
“Keeping public finances – and the interest bill in particular – on a sustainable path is particularly important in a monetary union where monetary policy is not always optimal for a small country.
“So as the policy framework around deficits and debt evolves, it does not relieve us of the need to reduce our deficit over time,” Donohoe said.