Bank of International Settlements and Irish debt

State still needs drastic action to cut deficit, BIS warns

by Jon Ihle in Sunday Tribune of 11 April 2010

Brian Lenihan: committed to reducing Ireland’s deficit to 3% by 2014

Ireland is on an unsustainable fiscal path and must undertake drastic measures to check the rapid growth of government liabilities to avoid long-term economic stagnation and financial instability, according to a new working paper on public debt published by the Bank for International Settlements (BIS).

The paper, called ‘The future of public debt’, projects that Ireland’s primary deficit/GDP ratio will rise to 13% by 2020 – despite steps taken in last year’s budgets – if current fiscal policy continues as is. The deficit this year is already 12.2%, the fourth worst among advanced economies, according to the Organisation for Economic Cooperation and Development (OECD).

The continuation of this deficit scenario would push Ireland’s public-debt levels to more than 150% of the country’s annual economic output, worse even than Greece’s current situation, which pushed up that country’s debt finance costs massively in recent months.

The paper said countries in Ireland’s situation should not only cut current spending, but also reduce future liabilities, such as age-related spending like pensions. Such action would slow or stop debt accumulation, although for Ireland, the UK and the US it would not be sufficient in itself to bring debt under control, the paper said.

Finance minister Brian Lenihan has committed to reducing Ireland’s deficit to just 3% by 2014 to comply with the EU Growth and Stability Pact, which underpins the euro. Lenihan cut €4bn from the budget in December 2009 and plans to take out another €3bn at the end of this year.

To bring the deficit down to pre-crisis levels within five years, the economy would have to generate an average annual surplus of 11.8%, according to the paper. Projections for next year put the deficit at 9.2%, or 20 percentage points off target for a rapid return to fiscal balance.

The loss of potential output caused by the crisis also means that government revenues could end up permanently lower, BIS said. Between 2007 and 2009, the ratio of government revenue to GDP fell by two-four percentage points, making recovery even more difficult.

Moreover, Ireland’s current public debt, which the BIS puts at 98% of GDP, exceeds the international historical average of 86% for countries three years into a banking crisis.

The paper said this high level of public debt means a larger share of Ireland’s financial resources will have to be devoted to servicing the debt. If the government is intent on maintaining current levels of public services and public sector pay, it must raise taxes as debt increases.

However, BIS warned that higher taxes could distort resource allocation and lead to lower levels of growth. It also said further tax increases might not actually raise further revenue because the distortionary impact of taxes could crowd-out productive private capital and reduce overall economic activity.

April 11, 2010

Other facts –
In 2008 – Ireland spent €1.5 billion on debt service – 3.8% of income tax
2009 – Ireland spend €2.5 billion on debt service – 7.7% of income tax

National debt today is 57% of GDP but add in NAMA €54 billion and €18 billion for Anglo and the debt is 108% of GDP not counting recapitalisation of AIB and BoI.