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Higher debt and deficits increase risks to the economy – Governor

The Governor of the Central Bank has warned that higher debt and deficit projections out to the middle of the decade increase the risks to the public finances and the economy.

In a pre-budget letter to the Minister for Finance, Gabriel Makhlouf refers to the revised projections for the public finances in the Summer Economic Statement which envisages a planned deficit of €7.4 billion by 2025.

That was €6.6 billion higher than the figure set out three months earlier in the Stability Programme Update.

While acknowledging that the debt ratio in 2025 is forecast to be broadly in line with the level at the end of 2020, the Governor points to the debt here being among the highest in the developed world.

“Analysis by Central Bank staff shows that a scenario with higher levels of expenditure and a permanent loss in corporation tax receipts funded by additional debt would see the debt to GNI* ratio increase further from its current high levels out to the middle of this decade,” Mr Makhlouf said in his letter.

Accounting for the favourable growth outlook and low interest rate environment, the larger deficits – together with higher debt – increase the risks to the public finances and the economy, the Governor warned.

A credible path to a lower debt ratio over the medium term was needed, he said.

Mr Makhlouf further cautioned that in an economy experiencing strong growth, there is a risk that higher government spending and tax changes could generate excessive inflationary pressures.

However, on the current inflation trend being witnessed in the wider global economy, the Governor said there was an expectation that the price pressures would ease and not lead to “excessive medium-term inflation”.

In response, the Department of Finance welcomed the Governor’s letter and said it would be considered as part of the budgetary process.

It acknowledged that a credible path towards a lower public debt ratio, as well as an increased emphasis on addressing the structural economic changes resulting from the pandemic, were essential items to be addressed.

The Department said the Government had outlined its medium-term fiscal strategy for restoring the public finances to a sustainable position in the Summer Economic Statement.

“The Government’s unprecedented level of fiscal support to households and business during the pandemic has allowed the public debt ratio to rise,” it said in its statement.

“As a temporary, emergency measure, this was the appropriate course of action, but clearly not sustainable past the short term.”

It went on to say that that the Government had committed to only borrowing to fund capital investment after 2023.

“Limits on the growth rate of current expenditure, operationalised through an expenditure rule will stabilise our public debt – albeit, as noted by the Governor, at an elevated level,” it said.

“The Minister is cognisant of the vulnerabilities to our economy that this level of public debt represents, and reducing this risk remains a key Government priority,” the statement concluded.

Article Source – Higher debt and deficits increase risks to the economy – Governor – RTE – Brian Finn

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